Seasonal decline? Global long-term bonds welcome "Black September"

Global long-term government bonds are experiencing one of the worst months in history, with seasonal selling pressure resonating with multiple structural factors, driving long-term bond yields to continue rising.

According to media statistics, the median loss of global government bonds with maturities exceeding 10 years in September over the past decade has reached 2%, making it the worst-performing month of the year. So far this year, ultra-long bonds have recorded a decline of 2.6%, with the year-to-date increase narrowing to 3.5%, while short-term bonds have seen an increase of 7.9% during the same period.

Behind this trend is the cumulative effect of multiple factors. From Europe, the Netherlands' nearly €2 trillion pension system reform is reshaping the market landscape, with the yields on 30-year government bonds in Germany and France rising for four consecutive months to multi-year highs. From the United States, investors are preparing for the employment data to be released on Friday, which will affect market expectations for the Federal Reserve's interest rate cut this month.

Market participants are generally cautious about September, as the seasonal increase in bond issuance intertwines with political uncertainty, adding extra pressure on long-term bonds.

September Effect: Seasonal Patterns Revealed by Historical Data

September has traditionally been a "cursed month" for long-term bonds. Statistics show that the median loss of government bonds with maturities exceeding 10 years in September over the past decade has reached 2%.

Mohit Kumar, Chief European Strategist at Jefferies International, attributes this seasonal phenomenon mainly to the issuance pattern:

The typical increase in long bond issuance in September is the main reason for the seasonal decline.

Long bonds do not see significant issuance in July and August, and there is also little issuance after mid-November.

This supply pressure is particularly evident during the relatively low liquidity period at the end of summer.

Shimomura, a senior portfolio manager at Tokyo's Fivestar Asset Management, attributes the volatility to changes in policy expectations:

September is often a time for abrupt shifts in monetary policy and is also a month for adjusting positions in anticipation of policy changes.

Dutch Pension Reform Impacts European Bond Market

In the European market, the structural reform of the Dutch pension system is having a profound impact on the long-term bond market in Europe.

According to analysts at ING Group, partly due to this reform, the indicators measuring the volatility of 30-year euro swaps have recently risen. The yields on 30-year government bonds in Germany and France continue to climb and are currently trading near multi-year highs.

The core of the reform is a shift in investment patterns. The new system requires younger members to allocate more funds to risk assets such as stocks, reducing the demand for long-term hedging tools; older members' savings tend to favor safe assets like bonds, but the duration of hedging will also shorten.

According to data from the European Central Bank, Dutch pension savings account for more than half of the total in the EU, holding nearly €300 billion in European bonds About 36 Dutch pension funds are set to switch to a new system on January 1st, coinciding with a period when market liquidity is typically low. If a large number of funds seek to close long-term hedge positions simultaneously, it could lead to congestion in trading systems.

Pierre Hauviller of Deutsche Bank stated that the transition could be "front-loaded," and the market is pricing for this, noting that "volatility trading ahead of early January is already very crowded."

Global Markets Face Multiple Challenges

In addition to European factors, the global long bond market is facing other challenges.

In Japan, Tuesday's 10-year government bond auction and the 30-year bond issuance later this week are under close scrutiny, as investors seek to gauge demand for Japanese debt amid questions surrounding Prime Minister Kishida Fumio's leadership and expectations of interest rate hikes from the central bank.

Strategist Mark Cranfield analyzed that Japanese bond traders will focus on the bid-to-cover ratio of the 10-year bond auction, with any number below 3.0 considered weak. The last time similar disappointing data appeared was in May, coinciding with the start of the Japanese yield curve sell-off.

In the United States, Friday's employment data will be a recent market risk point, as traders await confirmation of bets on a Federal Reserve rate cut this month. Meanwhile, eurozone inflation data is also on traders' radar.

Evelyne Gomez-Liechti, a multi-asset strategist at Mizuho International in London, stated that stronger-than-expected U.S. data and a potential hawkish shift from the Bank of Japan could be catalysts for worsening bond performance this month. She remarked, "There are many risks to contend with."

Risk Warning and Disclaimer

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