Chris Dillow, in his article in last week's issue on the old adage "Sell in May and go away", put forward the classic seasonality play for equities. Chris points out: "If you had switched from shares into cash every May Day and then switched back into shares on Halloween, £100 invested 30 years ago would have grown to over £5,000 by now. The same sum left in equities all the time would have grown to just over £2,800. If you'd begun seasonal investing five years ago, you'd have made almost 25 per cent while the All-Share made nothing."
Impressive stuff, but, if this is true for equities, would the inverse be true for gilts? After all, the two asset classes are negatively correlated (corporate bonds less so). Should investors buy gilts in the spring?
Certainly, May last year would have been a good time to buy gilts. Here's the chart of the UK Treasury 3.75% Sept 2020.
What about the year before (2010)? I am using a different benchmark for this period, the UKT 3.75% 2019. Once again, May looks to be a good entry point, although investors would have to have sold up in Sept/Oct to lock in the gain. Curiously, that is roughly the date of the St Leger Stakes at Doncaster, which is the second part of the old stockbroker adage: "Sell in May and go away, stay away 'til St. Leger Day".
Looking at the longer-term picture, it is easier to use the yield on the 10-year benchmark as a constant metric. My calculations show that, over the period 2010-11, gilt yields fell by 25 basis points over the spring-summer period. Bear in mind that falling gilt yields equate to rising prices. A 25 basis point drop in yield would result in a price gain of around 2.5 point on the current UKT 4% 2022 benchmark.
Of course, cynics will point out that gilts have been enjoying a lengthy bull market, thus sampling virtually any four-month repeating period will give a positive result. However, the 25 basis point yield shift over our chosen four-month period is considerably ahead of the average for the decade (yields have fallen by roughly 2.5 basis points per month since 2000).
Efficient market theory rules that seasonal investing is unlikely to be successful, at least in the long run, but I'm not so sure. Either way, traders should avoid short positions in gilts. If the pattern of the past 10 years repeats itself, the gilt benchmark will be yielding 1.75 per cent by the late summer.