Seasonal Variation in Treasury Returns

Abstract

We document a novel and striking annual cycle in the U.S. Treasury market, with a variation in mean monthly returns of over 80 basis points from peak to trough. We show that this seasonal Treasury return pattern does not arise due to macroeconomic seasonalities, seasonal variation in risk, the weather, cross-hedging between equity and Treasury markets, conventional measures of investor sentiment, seasonalities in the Treasury market auction schedule, seasonalities in the Treasury debt supply, seasonalities in the FOMC cycle, or peculiarities of the sample period considered. Rather, the seasonal pattern in Treasury returns is significantly correlated with a proxy for variation in investor risk aversion across the seasons, and a model based on that proxy is able to explain more than sixty percent of the average seasonal variation in monthly Treasury returns. The White (2000) reality test confirms that the correlation between returns and the proxy for seasonal variation in investor risk aversion cannot be easily dismissed as the simple result of data snooping.