Bond yields' typical October rise could spell trouble for markets this year

In trading, experience teaches that markets develop recurring patterns over time.

That does not mean history repeats itself with perfect accuracy every year. But certain months tend to produce similar outcomes with enough frequency to catch traders' attention. That concept forms the basis of seasonality analysis.

Essentially, it involves examining how an asset has performed during the same period in prior years and asking whether a pattern worth considering exists for the current period.

That said, seasonality should not be used as a predictive tool. If stocks have historically done well in October, that does not guarantee they will rise this month. In my view, the value of seasonality comes when we take those historical tendencies and compare them with current market conditions.

That is where the analysis becomes more compelling, and several patterns stand out as October trading begins.

First up is the bond market, which draws the most attention.

Over the past 15 years, 10-year Treasury yields have posted an average positive change of 6.52% (percentage change, not basis points) during October, making it easily the strongest month of the year for yields.

That pattern seems particularly notable now because the bond market is already the biggest pressure point for broader markets.

The softer US jobs report late last week provided some initial relief, pushing 10-year Treasury yields down toward 5.16%. But that move proved short-lived. Yields quickly recovered to the 5.28% area, underscoring how difficult it has been for bonds to sustain any meaningful recovery.

So the historical pattern described above does not emerge against a neutral backdrop. It aligns with the existing market trend. That could amplify any significant bond market selloff, with seasonal flows likely reinforcing the move.

Since October is the strongest month for rising 10-year Treasury yields, it also tends to be a good month for the dollar.

Historically, October ranks among the best months for USD/JPY, with the pair gaining an average of 1.79% over the past 15 years. More notably, the pair has risen every October for the past five years.

This connection becomes more interesting given that USD/JPY has been heavily influenced by the spread between US and Japanese interest rates. So a sustained rise in US yields would naturally support the seasonal bias toward a stronger move higher in the pair.

But USD/JPY is already at elevated levels, and intervention rhetoric is very much on the table. That remains a key caveat in terms of limiting any upside potential for the pair this month.

Turning to equities, the picture looks different.

The S&P 500 has averaged a 2.03% gain in October over the past 15 years, making it one of the stronger months on the calendar for US stocks.

At first glance, that seems encouraging. Although October is known for volatility and some infamous historical crashes, the more recent seasonal data actually paints a fairly constructive picture for equities.

However, a major problem looms this time around.

If October's strongest seasonal trend proves to be another significant rise in Treasury yields, then equities may face a much tougher backdrop to deliver their usual seasonal gains.

That matters especially when long-term yields are already at levels that pressure equity valuations and tighten financial conditions.

I would argue that stocks do not necessarily need yields to collapse in order to rally. But another sharp increase would make it much harder for equities to follow their historical October pattern.

To sum up, I would again caution against treating any of these numbers as standalone trading signals. Fifteen years is a useful window for examining behavioral and historical patterns, but it remains a relatively small sample.

What seasonality provides is another piece of the puzzle. And for this October, the most interesting part of that puzzle is that the strongest historical tendency happens to align with the market's biggest current concern.

With the bond market already refusing to give investors much relief, that is one seasonal pattern worth watching closely in the weeks ahead.