The January Effect, Not Exactly a Post-Holiday Sale

While January for most of us brings the uphill battle of working off all the food and cocktails of the Holiday Season, a little bright side are the post-holiday sales. That blender you weren't hoping to find under the tree can be exchanged for an item that orginally was worth even more than said wonderous blender. Or maybe you're like me and were holding out to get those shoes until they went on sale after the holidays. Either way, January is usually a month to take advantage of marked down items. Unfortunately this happens everywhere except the bond market. "The January Effect" as it's become known is due to the fact that January is the most expensive month to buy a bond. The basic reason for this is the supply-demand ratio is off, demand for municipal bonds takes a big jump in January.

Most large companies close their books the last 2 weeks in December so that when January First rolls around they have a ton of cash on hand. They need to put that money to work so these large companies start buying up bonds by the handful (which really means by the million). This puts quite a dent in the supply of bonds on the market.

Aside from the large institutions buying up bonds, there are a lot more bonds that mature in January as opposed to any other month. So in addition to the institutions needing to place their cash in bonds, after having their bonds called or mature, individuals need to replace that money too.

Since January is a big month for maturities and calls, it stands to reason that it is also a large interest paying month. Again, people are looking for bonds to place their interest in.

The best thing to do if you know you have a bond coming due in January or expect a large interest payment is to look for a bond in December and ask your broker for an extended settlement date. This way you can take advantage of the Holiday bond sale in December (AKA people selling their bonds for tax loss purposes). Happy bargain hunting!