Should You Sell Treasury Bonds Now or Wait Until the End of the Year? Here’s What to Do and Why

Some investment professionals are advising investors to hold off on selling their U.S. Treasury bond holdings until the year-end, citing seasonal trends that could favor bonds during this period. While a year-end bounce in the Treasury market would be a welcome relief—particularly after long-term Treasurys have plunged approximately 10% over the past two months, as represented by the Vanguard Long-Term Treasury ETF (VGLT)—relying on such a trend might not be a prudent strategy. Historical and statistical evidence suggests that counting on a year-end rally in Treasury bonds may not be wise.

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There are two key reasons why a year-end Treasury bounce might not materialize.

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Recent Phenomenon

First, positive seasonality in year-end Treasury performance is a relatively modern occurrence. For instance, the iShares 20+ Year Treasury Bond ETF (TLT), a popular proxy for long-term Treasurys, has only been in existence since 2002. Analysis of data from earlier decades indicates that this pattern of improved year-end performance for Treasury bonds is absent.

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While it’s tempting to argue that the Treasury market has undergone fundamental shifts over the last two decades, making older data less relevant, this assumption lacks strong theoretical backing. Lisa Kramer, a finance professor at the University of Toronto who specializes in researching seasonal patterns in stock and bond markets, commented on this issue. When contacted, she explained that she isn’t aware of any structural or theoretical rationale to prioritize data from the past two decades over earlier periods.

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Looking further back, 1952 is an ideal starting point for examining Treasury market seasonality. That year marked a significant change when the U.S. Federal Reserve and the Treasury reached an accord that allowed interest rates to respond more freely to market forces. Prior to this agreement, interest rates were largely fixed.

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Analyzing data from 1952 onward reveals no strong seasonal tendency. According to my review of the Ibbotson database (now part of Morningstar), the average total return for long-maturity U.S. Treasurys during December has been 0.59%. This is only slightly higher than the average return of 0.49% for the other 11 months. Statistically, this difference is insignificant and fails to meet the 95% confidence threshold commonly used to determine whether patterns are reliable.

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Weak Statistical Significance

The second reason to approach year-end seasonality with caution is its lack of statistical strength, even during the more recent two-decade period when positive seasonality appears to exist. Since 2002, the correlation between the months of the year and the average returns for long-term Treasurys is exceedingly weak.

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The investment’s “r-squared” value—a measure of how much variability in returns is explained by the seasonal trend—is less than 1%. This indicates that year-end seasonality accounts for less than 1% of the difference in performance between December and other months.

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In practical terms, this means that even if a modest year-end trend exists, its impact is easily overshadowed by a host of other factors that influence Treasury returns. Interest rates, inflation expectations, Federal Reserve policies, and broader market dynamics exert far greater influence on bond prices than any seasonal pattern.

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Implications for Investors

Given these findings, investors who believe long-maturity Treasurys are overvalued at current levels should not delay selling in hopes of a potential year-end bounce. The likelihood of a significant seasonal rally is too small to justify such a gamble, especially in light of the many uncertainties currently shaping the bond market.

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The decline in long-term Treasury prices over the past two months underscores the risks inherent in the market. With the Federal Reserve signaling its commitment to combating inflation and interest rates at multi-decade highs, bondholders are navigating a challenging environment. Seasonal trends, even if occasionally evident, are unlikely to reverse broader market forces.

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Ultimately, while the idea of a year-end rally in Treasurys might be appealing, it’s essential to approach this notion with skepticism. Historical data suggests that positive year-end seasonality is a weak and inconsistent phenomenon, while the myriad other factors influencing bond prices hold far greater sway. Investors should base their decisions on these broader dynamics rather than banking on a trend that has minimal statistical significance.

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For those weighing their options, the key takeaway is clear: if the fundamentals suggest selling is the right move, waiting for a December rebound could prove to be a costly mistake. Instead, prioritize sound judgment and a clear-eyed assessment of market conditions over the allure of seasonal patterns.

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