‘Tis the season for risk-asset volatility, but what about safe-haven assets?

Our resident friendly robot (also known as our in-house model) reminded us at the beginning of April that risk assets have historically been vulnerable in May. As the old market adage goes, “sell in May and go away”.

So far, selling risk assets at the beginning of May (and going away) looks to have been good advice: high-yield bond prices have fallen (yields have risen), and safe-haven assets, including US Treasuries, have rallied modestly. Before proponents of a defensive stance pat themselves on the back, it is worth pointing out that June is not usually a strong month for government bonds, and looking at the seasonal heat map below from the post financial crisis period onwards demonstrates this. Green is yields rising (prices falling) and red is the reverse.

10-year US Treasuries monthly % change in yield 2009-2016

Source: Bloomberg, 11 May 2016. For illustrative purposes only

Why is this so? It could be attributable to supply indigestion, or the result of improvement in economic statistics which typically characterises the pre-summer period. The rally in safe-haven government bonds has tended in the past to get going again from the middle of June onwards, and this year we have some key events that could act as a catalyst around that time, notably the Brexit vote on 23 June and the Federal Reserve’s Open Market Committee meeting taking place on 14-15 June.

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Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Past or current yields are not indicative of future yields. Where a strategy is invested in sub-investment-grade bonds, which typically have a low credit rating and carry a high degree of default risk, please be aware that this may affect the capital value of your investment.

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