30 Yr. Bond In April

Stock Trader’s Almanac provides very valuable analyses and interpretations of historical data. It has also developed many trading strategies based upon seasonal patterns in the commodities and equity markets. One such idea is a seasonal long trade in 30-Yr Bond starting in late April and holding for nearly four months.

Buying Treasury bonds is a “flight-to-safety” trade. When the market gets nervous it flocks to US Treasuries. This seasonal trend indicates that Treasuries bottom in April. The strategy goes long 30-Yr Bond (September contract) in late April and holds it for almost four months – exiting in August. Instead of futures, TLT – the ETF for long-term treasuries – could be used. AGG – aggregate bond ETF – could also be used.

Below is the hypothetical result of applying this strategy on TLT – starting in 2003 with each trade of $10,000:

Net Profit: $3,256
# of Trades: 9
Win %: 78%
Avg. Ret 3.6%
Avg. Win: $631
Avg. Loss: $(581)
Max Draw Down: (6)%
Avg. Days Trade Held 81

Here is how hypothetical TLT trades fared since 2003:

Entry Date Entry Price Exit Date Exit Price Shares Net
25-Apr-03 88.92 20-Aug-03 83.2 112 (641)
27-Apr-04 84.5 23-Aug-04 86.04 118 182
26-Apr-05 91.6 19-Aug-05 93.78 109 238
27-Apr-06 84.1 22-Aug-06 87.11 118 355
26-Apr-07 87.85 27-Aug-07 88.31 113 52
24-Apr-08 92.36 19-Aug-08 93.05 108 75
27-Apr-09 101 20-Aug-09 95.74 99 (521)
27-Apr-10 91.48 20-Aug-10 106.04 109 1,587
27-Apr-11 92.89 22-Aug-11 110.92 107 1,929

If this strategy was employed on ZB – the T-Bond Futures (September) – with $30,000 equity for each contract – then the hypothetical result since 2001 for one contract would have been:

Net Profit: $43,019
# of Trades: 11
Win %: 73%
Avg. Ret 13.0%
Avg. Win: $7,251
Avg. Loss: $(4,995)
Max Draw Down: (17)%
Avg. Days Trade Held 81

Here is how hypothetical ZB (continuous contract) trades fared since 2001:

Date Entry Exit Date Exit Net
27-Apr-01 100.00 22-Aug-01 105.00 4,998
24-Apr-02 101.01 19-Aug-02 108.01 7,002
25-Apr-03 113.00 20-Aug-03 106.01 -6,997
27-Apr-04 108.00 20-Aug-04 111.00 3,000
26-Apr-05 114.00 19-Aug-05 116.00 2,002
27-Apr-06 106.01 22-Aug-06 109.01 3,002
25-Apr-07 111.01 17-Aug-07 109.01 -1,997
24-Apr-08 116.00 18-Aug-08 117.01 1,008
27-Apr-09 125.00 19-Aug-09 119.01 -5,992
26-Apr-10 116.01 19-Aug-10 134.00 17,995
27-Apr-11 121.00 22-Aug-11 140.00 18,998

Despite a recent run up in the T-bonds, this year is also shaping up to be a good one for this strategy. TLT is just coming off a double bottom of around 109.50 formed in October 2011 and in March 2012 and is heading towards the recent high of 125.00. The entry for 2012 trade was 117.19.

The recent action/inaction of Federal Reserve/U.S. Govt./ECB/Euro Zone also seem to be positive for this trade. The real interest rate on 10-year US bonds are now getting negative. Let us see how this trade turns out. Based upon Commodity Trader’s Almanac’s seasonal trade pattern, this trade should last till the middle of August and we will have an update then.

The Fine Print: Before employing this strategy in your live account please understand the rationale behind this seasonality pattern. Then run some back tests for the trade start-date and holding periods. Make sure that the risk level, max draw down, win ratio and average loss falls within your comfort zone and that you can withstand the draw down and the associated risk. Also read our disclaimer.

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