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The US government’s fiscal year ends on September 30 of the year following the calendar year it begins in. For example, the 2024 fiscal year began on October 1, 2023, ending on September 30, 2024.
The fiscal year is the accounting period for the federal government. It’s often called “FY,” followed by the year it ends. For example, the 2024 fiscal year is “FY2024”.
The federal budget process involves the president, Congress, and federal agencies working together to create a budget for the upcoming fiscal year. The president’s proposal to Congress recommends funding levels for the next fiscal year. Congress then passes appropriations and submits funding bills to the president for signature.
The US government’s fiscal year significantly impacts financial markets because the federal budget process influences economic policy, government spending, and fiscal stability. Due to the importance of fiscal year-end funding, the government tends to have a reliable seasonal pattern affecting the interest rate market. This same impact will also lead to other effects affecting different assets.
Other Assets Impacted by US Government Fiscal Year-End
The US dollar may catch a bid and rally as this interest rate seasonal pattern leads to higher rates as government treasury prices fall. Gold will lose some value as interest rates rise, taking away the allure of gold as an investment. The higher rates may lead to more instability in the stock market as volatility increases each Fall, and a dramatic price decline is often seen. September is also a time when money managers of mutual funds begin tax loss selling, leading to more stock market selling pressure.
Impact of a Fed Rate Cut
Source: CMEGroup Exchange
The Federal Open Market Committee (FOMC) is expected to cut interest rates by 25 basis points at the upcoming September 18 meeting. During that time, they will also release the Summary of Economic Projections. Analysts are expecting this to show continued rate cuts shortly. The S&P 500 has had another double-digit return year so far. With projected lower rates and the election over in early November, analysts are seeing the market closing strong for the year.
Chairman Powell has stated that the goal of the current monetary policy is to get inflation back to their target rate of 2%. Forthcoming inflation data could dictate any upcoming rate cuts.
Nothing is carved in stone while the economy and bullish stock market sentiment continue. Traders and investors are reminded to be vigilant and apply sound risk management to their positions in the market.
Seasonal Pattern for Interest Rates
Moore Research Center, Inc. (MRCI) conducts thorough research on wide and narrow seasonal window opportunities. The upcoming seasonal sell for interest-rate products will last approximately two weeks in a narrow window. Yields move inversely to price direction for interest-rate products.
The interest rate market has been following its seasonal pattern well in 2024. Seasonally, the May-June timeframe begins to see lower interest rates (higher prices) into late August. I wrote about this seasonal pattern for Barchart in the following articles: “Long-Term Yields Poised to Fall – Lower Mortgage Rates Near” and “Seasonal Downtrend in Interest Rates Gains Momentum.”
We will look at a popular spread, the outright trades of the 30-year bonds, and the 5-year notes. When these products have had such high occurrences for the last 15 years, it becomes an enhanced potential opportunity for traders.
Source: MRCI
The above daily chart reflects the Notes-Over-Bonds (NOB) spread. This spread is a popular instrument for traders to play the difference between shorter- and longer-dated interest rates. When the NOB spread (green-red line) increases, it represents the market’s perception of buying the shorter-dated (10-year Treasury) and simultaneously selling the longer-dated (30-year Treasury.) The market is looking for higher interest rates in these longer-dated maturities during this time. Remember, the Federal Reserve controls short-term interest rates (Fed Funds out to 2-year notes), but the marketplace sets longer-dated rates through supply/demand and economic factors.
MRCI research has shown that the NOB spread seasonal pattern (blue line) turns up (higher rates) on approximately August 23 and closes higher around September 18, occurring for 14 of the past 15 years.
The second significant seasonal pattern is the 5-year Treasury note.
Source: MRCI
The daily chart reveals the historical pattern MRCI has found (blue line) overlaid on the price action. Notice the rally in price from July to current. The seasonal window history shows when prices have decreased during the past 15 years. MRCI research has found that the December 5-year Treasury note has closed lower on approximately September 16 than on August 30 for 15 of the past 15 years.
Source: MRCI
In contrast, two years did not have a daily closing drawdown.
The third part of this trifecta is the 30-year Treasury bond.
Source: MRCI
The 30-year Treasury Bond had the same early Spring price rally as the 5-year Treasury note. The NOB spread, the 5-year Treasury note, and now the 30-year Treasury Bond call for possible lower prices and higher rates during these two weeks (yellow box.) MRCI research of the seasonal pattern (blue line) illustrates that the 30-year Treasury bond has historically experienced selling pressure, resulting in a lower closing price on September 15 than on approximately September 02 for 14 of the past 15 years.
Source: MRCI
During the past 15 years of this seasonal pattern, the 30-year Treasury bond had four occurrences without a daily closing drawdown, an impressive number for a market as volatile as the bond market.
It’s important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
In closing….
As the US government’s fiscal year draws to a close, the resulting shifts in interest rates and financial markets underscore the importance of understanding the seasonal patterns that often accompany this period. The government’s budget decisions, influenced by the fiscal year-end, significantly shape economic policy, affecting everything from bond yields to stock market performance. Traders and investors must remain aware of these dynamics, as the seasonal patterns observed in interest rates can offer valuable opportunities for the well-prepared.
However, while these seasonal patterns provide critical insights, they are not foolproof. Market conditions can change rapidly, influenced by various factors, including unexpected economic data, geopolitical events, and shifts in investor sentiment. Therefore, traders and investors must complement their understanding of these patterns with risk management strategies and analysis of technical and fundamental indicators.
More Stock Market News from Barchart
On the date of publication,
did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy
here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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