10-Yr Treasury: Jan vs Rest-of-Year Performance

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10-Yr Treasury: Jan vs Rest-of-Year Performance

Yesterday we discussed how the S&P 500’s performance in January can be a predictor of the index’s return for the entire year. Here’s a quick recap of what we found:

  • The correlation of the S&P’s returns in January relative to the entire year was 0.41 from 1980 – 2020, or an r-squared of 16.5 percent. That’s pretty high for a simplistic one-variable model.
  • Additionally, the S&P has performed much better during years when January is a winning versus losing month (average of +15.5 pct vs +2.2 pct) back to 1980.

Therefore, we can understand why investors see January’s US equity return as at least somewhat indicative of the rest of the year’s performance.

Today, we’ll see if this old Wall Street adage applies to other asset classes like the 10-year Treasury note. First, a couple of background points:

  • Clearly yields have trended downwards over the last 40 years, so for this exercise we will give extra focus to years where the 10-year yield rose in January from 1980 – 2020.
  • We then looked at the direction of 10-year yields from the last day in January through the end of the year to see if January’s move was predictive of the rest of year’s trend in interest rates.

Here’s what we found:

  • The correlation between the 10-year yield’s January percentage change versus its rest-of-year percentage change is 0.23 back to 1980, or an r-squared of just 5.1 pct.
  • The 10-year Treasury yield has risen in January during 19 out of 41 years since 1980, or a little under half (46 pct) of the time. They have increased by an average of 26 basis points.

    Out of those 19 years when the 10-year yield increased in January, they continued to rise from the end of January through the balance of the year during 47 pct of those periods (9 times). They increased by an average of 97 basis points.
  • Out of the 22 times the 10-year yield has been flat or declined in January (54 pct of the time), they continued to fall from the end of January through the balance of the year during 68 pct of those years (15 times).

Here are our takeaways from this data:

#1: January’s performance is much more predictive of future US equity returns than the direction of Treasury yields. The r-squared for the S&P’s returns in January compared to the entire year is 16.5 pct from 1980 through 2020. By contrast, the r-squared for how the 10-year Treasury yield performs in January versus the rest of the year is just 5.1 pct.

#2: History shows the direction of Treasuries is basically a coin flip after the 10-year yield rises in January. It’s more likely for the 10-year yield to keep trending lower after falling in January than trend higher after rising during the first month of the year.

#3: If the 10-year yield continues to climb through the rest of this month, it’s historically gone on to rise by an average of 97 basis points more through the balance of the year in those periods when it has risen in both January and thereafter through year-end (again, history says this outcome basically has 50-50 odds). If you’re wondering what the downside case might be for long-dated Treasuries should January 2021 continue to see higher yields, that’s a reasonable way to think about that issue. The largest move from the end of January through year-end was +179 bps in 1999, and the smallest was +0.18 bps in 2006 (both late-cycle years).

Bottom line: even if the 10-year Treasury yield ends January 2021 higher than when it started the year, it does not mean it is destined to grind its way higher through-year end. If you want to lighten up at the long end of the curve here, we absolutely get that. Just don’t anchor too heavily on what you see on the screen this month, because as we’ve shown “So goes January, so goes the year…” may work for stocks but bonds move to their own fundamental signals.