A Strategy for all Seasons
While it may not be as clear as leaves falling off trees in Fall, seasonality still exists in the bond market, and patterns can be observed from one quarter to another. While the core of our team’s investment process is analyzing economic fundamentals and market technicals, we nevertheless find seasonality in rate movements to be a complement to our investment process. Looking at historical data, it’s not overly difficult to spot relevant rate patterns across time, and these patterns can be useful in helping us determine ideal positioning.
For example, we are expecting rates to stay low and range bond for some time thanks to all the QE programs put in place by the Bank of Canada, but in terms of specifics (i.e. will they be higher by 7 bps than today or lower by 4?) that we don’t know for certain. That said, we know that over the past 25 years, rates have declined, on average, by 17 and 7 basis points in the third and fourth quarter, respectively. We thus factored-in this information and slightly lengthened our duration at the end of the summer in case history repeats itself.
Seasonality like this could be considered an affront to the Efficient Market Hypothesis, but the fact is that at the end of the year, some asset managers might make fast and significant changes to their portfolios, topping them off to make it seem like their portfolios are perfectly within their IPS guidelines. This might cause demand/supply imbalances, particularly in less liquid markets, and active managers can take advantage. To be clear, the aforementioned numbers aren’t huge and one shouldn’t bet the farm on them, but seasonality is nonetheless worth watching and integrating in our process.
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