U.S. Treasury bonds may strengthen by the end of the year? Analysis: It's unrelated to rate cuts but rather a "resurgence of risk aversion."

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The U.S. Treasury market may show a positive trend at the end of the year, a trend that is not closely related to the Federal Reserve’s policy expectations but rather stems from historical data indicating a seasonal pattern—investors’ risk appetite declines in the autumn, driving up demand for safe-haven assets.

After Federal Reserve Chair Powell stated last week that a rate cut in December is “not a foregone conclusion,” the market’s expectations for a rate cut cooled significantly. According to the CME FedWatch tool, the probability of a rate cut in December dropped from about 90% before Powell’s press conference to the current 72%.

However, a major positive for bond investors at present is that the U.S. Treasury market exhibits a quite stable seasonal pattern, with prices peaking at the end of autumn and bottoming out in the spring. This pattern may offset investors’ disappointment with the Federal Reserve’s policy stance.

Seasonal patterns trace back to the 1970s

The seasonal characteristics of the U.S. Treasury market have not always existed; they originated when the U.S. Treasury began selling government bonds through public auctions in the early 1970s.

According to a study published in the Critical Finance Review in 2015, before the establishment of a market-based pricing mechanism, U.S. Treasury yields exhibited almost no seasonal behavior. But after the introduction of auction mechanisms and a regular, predictable issuance schedule, seasonal variation became a stable characteristic of Treasuries.

Data shows that the average monthly return on U.S. Treasuries in December is unremarkable, but when combined with November, their return is higher than that of any other two consecutive months in the year. This seasonal pattern has remained relatively stable over the past half-century.

Safe-haven sentiment as the driving mechanism

Researchers initially analyzed a variety of hypotheses to explain the causes of the seasonal pattern in Treasuries, including macroeconomic seasonality, seasonal changes in risk, weather factors, cross-hedging between the stock and bond markets, traditional measures of investor sentiment, the seasonal pattern of Treasury auction schedules, the seasonality of Treasury supply, and the seasonality of the Federal Open Market Committee’s cycle, but these were all individually refuted.

Ultimately, researchers found a plausible explanation: the seasonal variation in investors’ risk aversion. Specifically, in the autumn, investors begin to be affected by seasonal affective disorder, which in turn affects their willingness to assume risk.

The researchers wrote:

"If investors experience a decline in mood during the autumn, leading to increased risk aversion, then Treasury prices should rise, resulting in actual Treasury returns in the fall that are higher than average. Then, as investor sentiment improves in the spring and risk aversion diminishes, Treasury prices decline, causing actual returns to fall below average."

Risk Disclosure and DisclaimerThe market comes with risks; investment requires caution. This article does not constitute personal investment advice and does not consider individual users’ special investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article fit their particular situation. Investing accordingly is at your own risk. ```