Every month employees add to their retirement accounts. They do this through an intermediary, such as Fidelity, T Rowe Price, or another financial institution. They may also take out funds. Overall, these funds have grown over time. It should not be a surprise that these intermediaries have a well-defined policy for adding and withdrawing funds.
If you are familiar with the Goldman-Sachs Commodity Index (GSCI), which trades a wide selection of futures markets, their “prospectus” specifically says they will roll each futures contracts on specific days relative to the end of the contract. Because of how precise it is, and how rigid they execute it, the strategy called convenience yield has developed.
The GSCI is always long. It will roll a large quantity of contracts, forcing the nearby prices down and the deferred contract up. The idea of convenience yield is to sell the nearby contract ahead of the roll and/or buy the nearby after it has sold off. And you can also buy the deferred contract ahead of the roll and exit after the pop. It is essentially an arbitrage.
Bond Funds
Where do investors put their retirement savings? Mostly in bonds, or other government interest rates. Of course, part of the monthly additions to their IRA can go into stocks, but mostly it goes to bond funds. With interest rates high right now, bonds are even more popular. All institutions have their own bond funds, comprised of varying short and long maturities.
What they have in common is when they add and redeem from those funds. It’s similar to the GSCI. It’s rigid. Can you imagine a financial institution saying, “This month we’ll add on the 8th, next month on the 16th, and the following month on the 3rd.” I can’t. They will do what Goldman-Sachs does.
BND (Vanguard Total Bond Market Index) and BOND (Pimco Active Bond Index)
The two most popular bond indices, BND and BOND, are both ETFs. We will first look at the data from inception, but we will look at the past 5 years (from 2019) to see how higher rates have changed the patterns.
Figure 1 shows The Vanguard Total Bond Index (BND). It gained steadily until the recent increase in rates and has now seems to be back on track. However, we are not interested in the rates themselves, but in the flow of investor funds. Remember that BND is a managed fund, investing in a wide range of interest rates.
Figure 1. The Vanguard Bond Fund (BND) from 2007.
The PIMCO Bond Fund (BOND), has had a different performance. While BND was gaining from 2012 through 2020, BOND was mostly sideways, shown in Figure 2. Recently, returns of BND and BOND are similar.
Figure 2. The PIMCO Bond Fund Total Returns.
It is easy to see the difference when we start them both in 2012. Vanguard has been steadily better.
Figure 3. Total Returns of BOND compared to BND, from BOND inception in 2012.
Returns by Day of the Month
We want to see if there is an opportunity to exploit the fund flows. To do that we need to find a pattern in the way each fund adds and removes investments. If we look at the returns on each day of the month, we might find pattern. We need to align the first trading day of the month, regardless of what day it occurs. Day 1 is always the first day BND traded that month, Day 2 is the second day, and so on.
We will also go backwards from the last day of the month. Day -1 will be the last trading day, Day -2 the next to last day, and so on. We will do this for the first 10 days of the month and the last 10 days of the month. Since there are at most 23 trading days, that covers most days. Figure 4 compares the pattern of BND from 2008 to 2018 with the pattern from 2019 to 2023.
Figure 4. Comparing the average return of BND by day of month.
The more recent period, 2019-2003, shows much greater returns, an average of 0.69 compared to 0.43 for 2008-2018. Investors show that they are more interested in bonds with higher yields.
The most consitent returns over the two periods are on the last day of the month. That may also extend into the first two days of the next month. While the last day of the month was the same for both time periods, the second day of the month is much stronger recently. You’ll need to judge that yourself. There is also an interesting gain on days 7 and 8.
If we look at the volume in Figure 5 we can see that it confirms the last day of the month as well as the first two days of the next month. Days 7 and 8 have average-to-better volume. Another interesting statistic is that the last day of the month had an 81% chance of a higher return over the full set of years. The second day has a 75% chance, while days 7 and 8 had a 63% chance.
Figure 5. BND Average volume by day of month.
Confirming with the BOND ETF
Looking at the BOND ETF, we see a remarkably similar pattern. The last day of the month has good returns as do the first two days of the next month. Oddly, days 7 and 8 are also strong. It’s not clear if the fund has a well-defined plan or if this is a coincidence.
Figure 6. BOND returns by day of month.
How Much Can You Capture?
Based on the BOND ETF, entering on the close of the next to last day of the month, exiting on the close of the second day of the next month, nets 29 basis points from 2013 to 2018 and 40 basis points for the recent period. Days 7 and 8 returned 45 basis points recently but were not as reliable.
BND was lower in the older data but better recently. It returned only 10 basis points from 2008 to 2019 (but that included the 2008 financial crisis) and more recently 44 basis points.
That may not seem like a lot, but it has more reliability than most systems. Returning 44 basis points in each of three days over 12 months is a 5.28% return in only 36 days. That’s pretty good.
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