Abstract
Studying the returns of US Treasury, corporate, and municipal (muni) bonds at the index level over 2004-2020, I find a strong turn-of-the-year effect – low December returns and high January returns – in the high-yield muni index. The investment-grade muni index exhibits a similar but weaker effect. High-yield munis is the only class whose December returns are negatively correlated with year-to-date yield changes. Dominance of highly tax-sensitive households who engage in tax-loss selling, combined with opaqueness, low liquidity, and a small role of ETFs in munis make it difficult to arbitrage away the December price decreases. The investment-grade and high-yield corporate bond indices have abnormally high December returns in years with capital losses. The high-yield corporate index also has abnormally high December returns even in years without capital losses. It represents a change from the findings of prior research and suggests that corporate bond investors exhibit contrarian tendencies in December.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
In the money markets, Park and Reinganum (1986) find that the first Treasury bill maturing in a year has a higher yield than the one immediately preceding it (i.e., the last bill maturing in a year). No year-end effect was found in longer-term Treasuries, however. The turn-of-the-year effect in the money market securities is likely driven by the year-end preference for liquidity (Ogden 1987; Griffiths and Winters 1997, 2005) rather than window dressing (Musto 1997, 1999). Tax-loss selling is not relevant because money market securities very rarely generate losses.
A Bloomberg search for munis rated BB and below by S&P (Ba and below by Moody’s) returns about 3,600 securities with the par value of $408 billion ($468 billion).
See Tables L.210 through L.213 in the Federal Reserve Statistical Release Z.1: Financial Accounts of the United States, Q3:2020, https://www.federalreserve.gov/releases/z1/20201210/z1.pdf.
National in the category name refers to funds that invest in munis issued in different states, as opposed to funds specializing in munis issued by a single state. The word national is dropped throughout the rest of the paper.
Financial advisors are more likely to recommend high-yield munis to households of truly significant wealth – those who can afford to take on higher credit risk in parts of their well-diversified portfolios. Financial advisors commonly suggest tax-loss selling to their clients (Cici et al. 2017; Starks et al. 2006).
References
Chang EC, Pinegar JM (1986) Return seasonality and tax-loss selling in the market for long-term government and corporate bonds. J Financ Econ 17:391–415
Chen H, Estes J, Ngo T (2011) Tax calendar effects in the municipal bond market: tax-loss selling and cherry picking by investors and market timing by fund managers. Financ Rev 46:703–721
Cheung W, Fung S, Tsai S (2010) Global capital market interdependence and spillover effect of credit risk: evidence from the 2007–2009 global financial crisis. Appl Financ Econ 20:85–103
Cici G, Kempf A, Sorhage C (2017) Do financial advisors provide tangible benefits for investors? Evidence from tax-motivated mutual fund flows. Rev Financ 21:637–665
Cochrane J (1999) Portfolio advice for a multifactor world. Economic Perspectives: federal Reserve Bank of Chicago 23:59–78
Cooper R, Shulman J (1994) The year-end effect in junk bonds. Financ Anal J 50:61–65
Doran J, Jiang D, Peterson D (2012) Gambling preference and the new year effect of assets with lottery features. Rev Financ 16:685–731
Griffiths M, White R (1993) Tax-induced trading and the turn of the year anomaly: an intraday study. J Financ 48:575–598
Griffiths M, Winters D (1997) On a preferred habitat for liquidity at the turn-of-the-year: evidence from the term-repo market. J Financ Ser Res 12:21–38
Griffiths M, Winters D (2005) The turn of the year in money markets: tests of the risk-shifting window dressing and preferred habitat hypotheses. J Bus 78:1337–1363
Harris L, Piwowar M (2006) Secondary trading costs in the municipal bond market. J Financ 61:1361–1397
Ivković Z, Poterba J, Weisbenner S (2005) Tax-motivated trading by individual investors. Am Econ Rev 95:1605–1630
Jordan S, Jordan B (1991) Seasonality in daily bond returns. J Financ Quant Anal 26:269–285
Kamstra M, Kramer L, Levi M, Wermers R (2017) Seasonal asset allocation: evidence from mutual fund flows. J Financ Quant Anal 52:71–109
Keim D (1983) Size-related anomalies and stock return seasonality: further empirical evidence. J Financ Econ 12:13–32
Kotomin V, Smith S, Winters D (2014) Interest-rate and calendar-time effects in money market fund and bank deposit cash flows. J Econ Financ 38:84–95
Lakonishok J, Shleifer A, Thaler R, Vishny R (1991) Window dressing by pension fund managers. Am Econ Rev 81:227–231
Lynch A, Puckett A, Yan X (2014) Institutions and the turn-of-the-year effect: evidence from actual institutional trades. J Bank Financ 49:56–68
Maxwell W (1998) The January effect in the corporate bond market: a systematic examination. Financ Manag 27:18–30
McLean R, Pontiff J (2016) Does academic research destroy stock return predictability? J Financ 71:5–32
Moody’s (2019) US municipal bond defaults and recoveries. 1970-2018
Musto D (1997) Portfolio disclosures and year-end price shifts. J Financ 52:1563–1588
Musto D (1999) Investment decisions depend on portfolio disclosures. J Financ 54:935–952
Ogden J (1987) The end of the month as a preferred habitat: a test of operational efficiency in the money market. J Financ Quant Anal 22:329–343
Park., S., and M. Reinganum, (1986) The puzzling behavior of treasury bills that mature at the turn of calendar months. J Financ Econ 16:267–283
Rakowski D, Wang X (2009) The dynamics of short-term mutual fund flows and returns: a time-series and cross-sectional investigation. J Bank Financ 33:2102–2109
Reinganum M (1983) The anomalous stock market behavior of small firms in January. J Financ Econ 12:89–104
Ritter J (1988) The buying and selling behavior of individual investors at the turn of the year. J Financ 43:701–717
Roll R (1983) Vas ist das? The turn-of-the-year effect and the return premium of small firms. J Portf Manag 9:18–28
Rozeff M, Kinney W (1976) Capital market seasonality: the case of stock returns. J Financ Econ 3:379–402
Securities and Exchange Commission (2012) Report on the municipal securities market. https://www.sec.gov/news/studies/2012/munireport073112.pdf
Sias R, Starks L (1997) Institutions and individuals at the turn-of-the-year. J Financ 52:1543–1562
Standard and Poor’s (2016) Unveiling the hidden cost of retail bond buying & selling. https://media.spglobal.com/documents/SPGI-fixed-income-update-unveiling-the-hidden-cost-of-retail-bond-buying-and-selling-august-2016.pdf
Starks L, Yong L, Zheng L (2006) Tax-loss selling and the January effect: evidence from municipal bond closed-end funds. J Financ 61:3049–3067
Warther V (1995) Aggregate mutual fund flows and security returns. J Financ Econ 39:209–235
Wheelock D, Wohar M (2009) Can the term spread predict output growth and recessions? A survey of the literature. Federal Reserve Bank of St. Louis Rev 91:419–440
Acknowledgements
I am thankful for helpful comments from Drew Winters and seminar participants at Illinois State University. The author thanks the Department of Finance, Insurance & Law at Illinois State University for financial support.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Kotomin, V. The clientele effect around the turn of the year: evidence from the bond markets. J Econ Finan 45, 637–653 (2021). https://doi.org/10.1007/s12197-021-09550-y
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12197-021-09550-y