The Federal Government requires substantial capital to keep the country running. Taxes are collected throughout the year to accommodate a portion of these needs. Another funding source comes from issuing Treasury Bills, Notes, and Bonds issued through frequent auctions and having different maturities. These issues act as loans to the Federal Government until they mature. As the securities mature, the Treasury will repay the investor the principal, face value, and the interest earned for loaning the money.
The US Government guarantees the loan's principal, reducing any risk to the investor. This is why money flows to US Treasuries, a safe haven, during times of crisis, whether domestic or international.
Yields on 10-year Treasuries fluctuate based on market-driven supply and demand more than shorter-dated Treasury Bills that mature in 1 year or less, driven more by Federal Reserve policy.
Because the 10-year Treasury Note is used by many institutions, mortgage companies, domestic and international banks worldwide, and many other users, it has become the benchmark of all interest-rate securities issued in the US.
In this article, I would like to discuss how the seasonality of the 10-year Note can impact your personal finances for better timing of when to use them.
Each of these is significantly affected by the 10-year Note:
- Mortgages
- Investing in Treasury Bills (shorter maturities)
- Gold Purchases
- Exchange Traded Funds (ETFs) for interest-rate products
Mortgages
Mortgages are closely tied to the yields on 10-year Notes. When short-term interest rates were close to zero percent during the pandemic, 10-year Note yields were down to .40%. In turn, mortgages were as low as 2.75% for 30-year fixed loans. As inflation became an issue, interest rates rose dramatically. The 10-year Note yield has reached 4%, and 30-year mortgages were just above 7%.
Home sales remained hot, and home inventory was low, resulting in higher-priced homes and a significant financing cost increase due to higher interest rates. Many home buyers were priced out of the market, while others made purchases and assumed they would refinance later to reduce their mortgage payments.
But when is the right time of the year to refinance or lock in a loan for the best rate?
Typically, interest rates have a seasonal low each year at the end of August. Due to the government's fiscal year-end on September 30, the government tends to issue fewer Treasury securities during this time, reducing the supply available.
Knowing this seasonal pattern could save a home buyer considerable financing costs.
Investing in Treasury Bills (shorter maturities)
During the stock market bear market, many investors have pulled money out of equities and invested in short-term Treasury Bills with yields at 5.25% with guaranteed principal protection. Try getting that in the stock market during these volatile times.
To keep their capital liquid during the bear market, many investors use short-duration T-Bills such as 4-week maturities. Allowing them to collect their principal quickly if they felt the stock market was ready to rise again.
Being aware that interest rates seasonally decline from the end of May to the end of August might alert a studious investor that the 4-week maturity would be invested at lower rates each time it matures for the next three months. Another solution is to purchase a 13 or 26-week T-Bill to lock in the higher rate through the trough in rates.
If the market maxim of "Sell in May and come back after Labor Day" causes the equity market to continue in its bearish nature, it would be something to consider.
Gold Purchases
Personal finance could intrigue some individuals to purchase gold because they feel the world is despairing or inflation will continue higher than the Federal Reserve claims.
Investing in gold at a time when there is a calculated chance it will continue higher makes more sense than just randomly buying and holding. But when is that time?
Gold and interest rates generally have an inverse correlation. As interest rates increase, investors feel safer locking in the higher rate with a guarantee on their principal rather than investing in gold with the fear of losing principal through adverse price moves.
Note on interest rate products: Rates increase when the security price decreases. When rates go down, the price of the security goes up.
Looking at our seasonal pattern for rates, if rates begin to fall (prices go up) in late May and bottom in late August, purchasing gold in late May could be a good decision. As rates are falling, gold has no competition and could receive more buying power.
Highlighted in yellow, the table above illustrates that over the past 180 days, gold and 30 (USM23) and 10-year (TYM23) Treasuries closing prices have correlated 79% and 74%, respectively.
Exchange Traded Funds (ETFs) for interest-rate products
If an investor is sitting on cash after withdrawing it from the stock market, they may be looking for a way to get a return using ETFs in their stock accounts.
The 20+ Year Treasury Bond Ishares ETF symbol (TLT) typically tracks the direction of the 10-year Treasury prices. An investor could buy TLT to participate in the seasonal rally from the end of May to the end of August.
Please do your due diligence before purchasing any security mentioned in this article.
Seasonal Pattern Analysis
Source: Moore Research Center, Inc. (MRCI)
The 10-Year Treasury rate chart (plots the rate, not the price) illustrates a 15-year pattern of high seasonal rates typically occurring in late March and low seasonal rates appearing during the latter part of August.
Source: MRCI
The Daily September 10-Year Treasury Note futures prices are illustrated on the price above. The yellow vertical bars reflect the past five years of the seasonal pattern. The left side of the yellow bar represents late May, and the right is late August, each representing higher prices.
MRCI has found this pattern for 10-Year Treasury prices closing higher in August than in late May 93% of the time for the past 15 years, having a record of 14 wins and 1 loss. During the past 30 years, the pattern worked 87% of the time, having a record of 26 wins and 4 losses.
Summary
As with any market analysis, due diligence on each individual's part is essential. I've provided a reliable seasonal pattern over a large sample size, but in any given year, it could fail.
Merging personal finance with market and seasonality analysis could offer opportunities not ordinarily seen by many who are not involved in the markets regularly.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
