Peak Pessimism On US Treasuries? History Says A Summer Rally May Be Near

As long-dated Treasury yields hover just below 5% and Moody's strips the U.S. of its final AAA credit rating, investor sentiment toward U.S. government bonds has reached some of its most bearish levels in decades.

Much of the gloom surrounds concerns over rising fiscal deficits, ballooning interest expenses and a perceived lack of political will to rein in debt.

At the center of the debate is President Donald Trump's tax plan, dubbed as the “One, Big, Beautiful Bill,” which is now under fire for potentially worsening America's fiscal outlook.

According to new estimates from the Congressional Budget Office released Wednesday, the legislation is expected to slash federal revenue by $3.67 trillion through 2034, while cutting just $1.25 trillion in spending.

The net effect: a $2.4 trillion increase in the federal deficit over the next decade.

This comes at a time when the U.S. deficit-to-GDP ratio already stands at 6%-7%, levels rarely seen outside of major crises such as wars or the COVID-19 pandemic.

A growing deficit implies increased bond issuance, and with higher supply comes the need for more attractive yields to lure buyers—putting upward pressure on rates and downward pressure on bond prices.

With the national debt surging past $36.2 trillion in early June and long-term yields climbing, influential Wall Street voices like JPMorgan Chase CEO Jamie Dimon and former Bridgewater Associates CIO Ray Dalio are warning that a full-blown crisis is no longer a distant risk—but an inevitable consequence of unchecked borrowing in Washington.

A Contrarian Opportunity?

Despite the bleak macro backdrop, a contrarian perspective would say that we may be approaching peak pessimism on U.S. Treasuries.

While the fundamentals and technicals remain unfavorable, a glimmer of hope may lie in seasonal performance trends.

According to data from Seasonax, the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT)—the largest ETF tracking long-dated U.S. government debt—has historically delivered strong summer returns.

Looking at the past 22 years, a strategy that buys TLT on June 10 and sells it on August 31 (or the nearest trading day thereafter) has delivered a median return of 4.3%.

The strategy was profitable in 18 of the last 22 years, reflecting an 82% win rate. Notable rallies occurred in 2010 and 2019, with gains of 13.6% and 12.8%, respectively.

The biggest summer-season loss in this period occurred in 2003 when TLT fell 13.2%. However, most of the losing years showed only modest declines.

With a Sharpe ratio of 1.01 and a Sortino ratio of 1.87 during this window, the strategy has historically delivered positive risk-adjusted performance.

Start Date	$TLT Price	End Date	$TLT Price	% Change
10 Jun 2003	54.68	02 Sep 2003	47.40	-13.32%
10 Jun 2004	48.87	31 Aug 2004	53.07	+8.58%
10 Jun 2005	59.59	31 Aug 2005	60.71	+1.89%
12 Jun 2006	56.43	31 Aug 2006	58.40	+3.48%
11 Jun 2007	57.55	31 Aug 2007	61.69	+7.19%
10 Jun 2008	65.07	02 Sep 2008	68.84	+5.80%
10 Jun 2009	66.17	31 Aug 2009	72.97	+10.27%
10 Jun 2010	75.14	31 Aug 2010	85.34	+13.58%
10 Jun 2011	79.14	31 Aug 2011	87.79	+10.92%
11 Jun 2012	105.81	31 Aug 2012	107.90	+1.97%
10 Jun 2013	97.22	03 Sep 2013	90.65	-6.76%
10 Jun 2014	98.92	02 Sep 2014	104.79	+5.94%
10 Jun 2015	105.76	31 Aug 2015	111.65	+5.57%
10 Jun 2016	126.51	31 Aug 2016	131.77	+4.16%
12 Jun 2017	119.60	31 Aug 2017	123.61	+3.35%
11 Jun 2018	117.68	31 Aug 2018	119.88	+1.87%
10 Jun 2019	130.50	03 Sep 2019	147.21	+12.80%
10 Jun 2020	160.84	31 Aug 2020	162.19	+0.84%
10 Jun 2021	142.54	31 Aug 2021	148.83	+4.41%
10 Jun 2022	113.77	31 Aug 2022	111.88	-1.66%
12 Jun 2023	102.22	31 Aug 2023	96.64	-5.46%
10 Jun 2024	90.89	03 Sep 2024	97.75	+7.55%

Read Next:

• US Private Sector Hiring Slows The Most In 2 Years: ‘Powell Must Now Lower The Rate,’ Trump Says
  

Photo: Shutterstock