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I have written in the past about how long-term treasury bonds perform better during certain days of the month than others. The strategy discussed herein is an extremely “aggressive” (remembering that one man’s “aggressive” is another man’s “way too risky”) approach to playing this pattern.

The Good Days

The “Good Days” for bonds are:

*Trading Days of the Month #’s 10, 11 and 12

*The last 5 trading days of the month

Figure 1 displays the hypothetical growth of equity from holding long 1 t-bond futures contract ($1,000 per point) on “Good Days” versus “All Other Days”

Figure 1 – Long 1 t-bond futures contract on “Good Days” (blue) versus “All Other Days” (red); 1984-2020

The long-term results pretty much speak for themselves.  So now, let’s get “aggressive.”

Ticker TMF is intended to return 3 times the daily return for the long-term treasury bond.  So, if the long bond goes up 1% today then TMF should go up roughly 3%.  And vice versa.  To put it another way – “You’d better be right” about your timing or losses are going to accrue very quickly.

So, what happens if we trade our TDM Strategy using ticker TMF (i.e., holding TMF for the 8 trading days of month listed above every month)?  As a benchmark we will also track buying and holding ticker TLT, an ETF which tracks the long-term treasury bond but with no leverage.  Figure 2 displays the hypothetical growth of $1,000 invested in both the TDM Strategy (blue) and the TLT buy-and-hold strategy (red line) since April 2009 when TMF started trading.

NOTE: The results represent price action only and DO NOT include any dividends. 

Figure 2 – Growth of $1,000 in TDM Strategy versus TLT Buy/Hold; 2009-2020

For the record:

*The TDM Strategy grew to $24,758 and the TLT Buy/Hold Strategy grew to $1,406. 

*The average 12-mo % return for the TDM Strategy is +35.9% versus +3.4% for TLT Buy/Hold (remember that TLT results here are price only and DO NOT include dividends which would boost results)

Sounds pretty great, right?  So, what’s the catch?  Two things: 1) extreme risk/volatility and, 2) the thing may be due for a drawdown.

*Note that the average 12-month standard deviation for the TDM Strategy is 27.8% versus 11.4% for buying-and-holding ticker TLT.  Lot’s of people look at the overall return for a given strategy and simply ignore the day-to-day volatility.  In the case of the TDM Strategy it is also easy to forget that you have to make four trades every month without fail (no matter how the strategy has been performing of late) in order to garner any long-term benefit.

IMPORTANT NOTE: Lots of people think they can handle constant volatility and continuing to trade on a regular basis even when things are going poorly (which they absolutely, positively will from time to time).  The TDM Strategy definitely fits in this category.

Regarding Drawdowns

Figure 3 displays the drawdowns for the TDM Strategy.  The key thing to note is that drawdowns of -15% are a regular occurrence.  You have been warned.

Figure 3 – TDM Strategy % Drawdowns

On the other hand, Figure 4 displays the drawdowns for both the TDM Strategy and TLT Buy/Hold. While the TDM Strategy (because of 3x leverage) always hold the potential for larger drawdowns, the overall performance is not really much different than the drawdowns for the TLT Buy/Hold approach.

Figure 4 – % Drawdowns for both TDM Strategy (blue) and TLT Buy/Hold (red)

Due for a Pause?

Figure 5 displays the 12-month % return for the TDM Strategy.  As you can see, results in the past year or so have been terrific.  Unfortunately, you can also see that these types of returns don’t last forever.  So, it is important to avoid the “Wow, I am going to make a lot of money quickly” mindset on the way in.

Figure 5 – TDM Strategy 12-month % +(-)

Summary

Would a trader have made money in the past using the TDM Strategy with ticker TMF?  According to hypothetical results, the answer is “presumably so”.  Will a trader make money doing so going forward?  That is an entirely different question.  Beyond the standard “past performance does not guarantee future results” disclaimers, simply note that while “big returns” can put stars in people’s eyes, the ongoing act of engaging in “the nitty gritty of trading” (in this hypothetical case, making two buys and two sells each and every month NO MATTER WHAT and with no exceptions) can be a far different experience.

Again, you have been warned.

Jay Kaeppel

Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author.  The information presented does not represent the views of the author only and does not constitute a complete description of any investment service.  In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security.  The data presented herein were obtained from various third-party sources.  While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets.  Past performance is no guarantee of future results.  There is risk of loss in all trading.  Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance.  Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.