Buy Treasury Futures This Tuesday, 35 Years of Trading Data Show

(Bloomberg) -- Holidays offer a predictable break in the calendar, and a reliable way to cash in on the Treasury market, according to Morgan Stanley.

Prices of 10-year Treasury futures move differently around every holiday, but they’re consistent enough on an annual basis to successfully trade on, strategists Tony Small and Matthew Hornbach found.

By studying patterns around 10 U.S. holidays as far back as 1983 when Treasury trading is either closed or minimal, the analysts came up with strategies for each event. When executed together each year, the trades would have been profitable annually since 1987.

It just so happens that the U.S. Memorial Day holiday on Monday, May 28, when U.S. financial markets will be shut, provides the next opportunity.

The strategists recommend buying 10-year futures on the Tuesday after the holiday and selling them on Friday. That approach returned 0.43 percent on average since 1983 and posted the best ratio of returns above benchmark, taking volatility into account out, of any the report tested. As it turns out, the trade works best when Memorial Day falls on May 28 or later.

“It’s possible that month-end rebalance flow or reinvestment of large quarterly refunding coupons occurs after the holiday and during this period,” the two strategists wrote in a Tuesday note.

July 4 Window

Looking ahead to the U.S. summer, the analysts recommend buying futures two days after the U.S. Independence Day holiday in July, and selling them two trading days later, as “summer seasonality, possible flows associated with the start of a new quarter, and flows observed from Japanese insurance buying may be at work.”

The overall strategy returned an average of 2.22 percent since inception. It had its best year in 2008, returning 7.33 percent. Its worst performance was a loss of 2.54 percent in 1987. All trades were made either at 3 p.m. in New York or at the time prices are settled if the market closes early for a holiday.

“While history seldom repeats itself, it may rhyme enough for this strategy to offer investors an idea about how to tactically trade around U.S. holidays,” the analysts wrote.

To contact the reporter on this story: Ivan Levingston in New York at ilevingston@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Brian Chappatta

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