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Predictable End-of-Month Treasury Returns

Last Updated on 10 February, 2024 by Rejaul Karim

The paper “Predictable End-of-Month Treasury Returns” sheds light on a compelling and intricate pattern uncovered in the realm of excess returns on coupon Treasury securities.

Notably, the discernment of positive and highly significant average returns during the last few days of the month, juxtaposed against insignificance during other periods, raises perplexing questions and draws attention to a striking temporal dimension in market behavior.

The revelation that a long Treasury position specifically during the tail end of each month yields a notably high annualized Sharpe ratio of around 1 encompasses a burst of insights into strategic investment timing.

Attributing this pattern to transient spikes in investor demand induced by window dressing and portfolio rebalancing adds an additional layer of complexity to this compelling analysis.

Moreover, the correlation established between aggregate insurer transactions and the end-of-month price pattern provides a tantalizing angle to the broader market dynamics. This thought-provoking study promises to provoke critical discussions on anomalies, market efficiency, and portfolio rebalancing within the domain of Treasury yields.

Abstract Of Paper

We document a distinct pattern in the timing of excess returns on coupon Treasury securities. Average returns are positive and highly significant in the last few days of the month, and are not significantly different from zero at other times. A long Treasury position for just the last few days of each month gives a high annualized Sharpe ratio of around 1. We attribute this pattern to temporary spikes in investor demand for specific securities due to window dressing and portfolio rebalancing. We find evidence in quantities that aggregate insurer transactions contribute to the end-of-month price pattern. In particular life insurers are large net buyers of Treasury securities on benchmark index rebalancing dates.

Original paper – Download PDF

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Author

Jonathan Hartley
Stanford University

Krista Schwarz
Board of Governors of the Federal Reserve System

Conclusion

In conclusion, the discernment of a distinct pattern in the timing of excess returns on coupon Treasury securities, particularly the marked positivity and significance during the last few days of the month, presents a compelling conundrum that beckons further exploration.

The revelation that a long Treasury position confined to the twilight of each month yields a notably high annualized Sharpe ratio of around 1 encapsulates a burst of insights into strategic investment timing, with implications for portfolio performance.

The attribution of this pattern to transient spikes in investor demand engendered by window dressing and portfolio rebalancing adds an additional layer of complexity and depth to our understanding of market dynamics.

Moreover, the correlation established between insurer transactions and the end-of-month price pattern furnishes a tantalizing angle to the broader market dynamics, promising to provoke critical discussions on anomalies and market efficiency within the domain of Treasury yields.

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FAQ

Q1: What distinct pattern in excess returns on coupon Treasury securities does the paper “Predictable End-of-Month Treasury Returns” uncover?

A1: The paper reveals a distinct pattern where average returns on coupon Treasury securities are positive and highly significant during the last few days of the month, while being insignificantly different from zero at other times.

Q2: What is the annualized Sharpe ratio associated with a long Treasury position during the last few days of each month, and what does it signify?

A2: A long Treasury position during the last few days of each month yields a notably high annualized Sharpe ratio of around 1, signifying a burst of insights into strategic investment timing and potential implications for portfolio performance.

Q3: What does the study attribute the observed end-of-month price pattern to, and how does it contribute to our understanding of market dynamics?

A3: The observed end-of-month price pattern is attributed to transient spikes in investor demand induced by window dressing and portfolio rebalancing. This attribution adds complexity and depth to our understanding of market dynamics, highlighting the impact of these factors on Treasury yields.

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