The Obama Trade

Prior to President Barack Obamas election to office, since 1945, there have been 16 Presidential terms. Seven of them have been Democratic Presidents and 9 have been Republicans. A study of interest rates for each Presidential term reveals that during a Republican term, interest rates have had a tendency to work their way lower and when the Democrats have been in control, theyve tended to move higher. To illustrate how rates move higher during a Democratic Presidential term, well take a look at short-term rates (90 days), mid-term rates (5 years) and long-term rates (30 years). By creating charts of interest rates for each 4-year period, its possible to get a complete picture of exactly what happened with rates for each Presidents term. Since the interest rate itself is not as important as the pattern, weve scaled the following charts between 0% and 100%. Zero% being the lowest rate during the 4 years and 100% being the highest.

Short-term Rates
Below is a composite chart of the 7 previous Democratic Presidential terms. Because weve scaled each of the 7 charts between 0% and 100%, its possible to blend them together and plot an average.
90-Day T-Bills 7 Democratic Presidential Terms

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2009

2010

2011

2012

The chart above represents an average day-to-day profile of interest rates during a typical Democratic Presidential term. The scale on the left of the chart goes from 0% to 100% with 0% representing the lowest rate of the 4-year period and 100% representing the highest rate of the 4-year period. In the chart above of 90-day T-Bills, on average, the rates are the lowest during the first year of a Democratic Presidential term. Then, during the second and third years, rates have a tendency to move higher finally peaking near the end of the fourth year.

Its important to note that not one of these U.S. Presidents has ever done anything to purposely cause interest rates to go up or down. Instead, interest rates have reacted to the policies of each administration. What follows are charts of short-term interest rates for each of the 7 Democratic Presidential terms.
90-Day T-Bills 1945 to 1948 - Franklin Roosevelt

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1945

1946

1947

1948

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1949

90-Day T-Bills 1949 to 1952 - Harry Truman

1950

1951

1952

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1961

90-Day T-Bills 1961 to 1964 - John Kennedy

1962

1963

1964

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1965

90-Day T-Bills 1965 to 1968 - Lyndon Johnson

1966

1967

1968

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1977

90-Day T-Bills 1977 to 1980 - Jimmy Carter

1978

1979

1980

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1993

90-Day T-Bills 1993 to 1996 - Bill Clinton

1994

1995

1996

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1997

90-Day T-Bills 1997 to 2000 - Bill Clinton

1998

1998

1999

As we can see, in regards to short-term interest rates, in most cases the overall pattern is for lower rates at the start of the Presidential term and higher rates by the end of the term.

Intermediate-term Rates
For intermediate-term rates, well be looking at 5-Year T-Notes:
5-Year T-Notes 7 Democratic Presidential Terms

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2009

2010

2011

2012

As with short-term rates, the composite chart of 5-Year T-Notes shows that rates are the lowest during the first year of the Democratic Presidential term. Then, during the second and third years, rates have a tendency to move higher finally peaking near the end of the fourth year. Here are charts of intermediate-term rates for each of the 7 Democratic terms.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1945

5-Year T-Notes 1945 to 1948 - Franklin Roosevelt

1946

1947

1948

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1949

5-Year T-Notes 1949 to 1952 - Harry Truman

1950

1951

1952

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1961

5-Year T-Notes 1961 to 1964 - John Kennedy

1962

1963

1964

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1965

5-Year T-Notes 1965 to 1968 - Lyndon Johnson

1966

1967

1968

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1977

5-Year T-Notes 1977 to 1980 - Jimmy Carter

1978

1979

1980

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1993

5-Year T-Notes 1993 to 1996 - Bill Clinton

1994

1995

1996

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1997

5-Year T-Notes 1997 to 2000 - Bill Clinton

1998

1998

1999

Again, in most cases the overall pattern is for lower rates at the start of the Presidential term and higher rates by the end of the term.

Long-term Rates
And finally, heres a look at long-term interest rates. Well be using 30-Year T-Bonds. Heres the composite chart:
30-Year T-Bonds 7 Democratic Presidential Terms

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2009

2010

2011

2012

As we can see, the patterns the same regardless of the time period.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1945

30-Year T-Bonds 1945 to 1948 - Franklin Roosevelt

1946

1947

1948

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1949

30-Year T-Bonds 1949 to 1952 - Harry Truman

1950

1951

1952

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1961

30-Year T-Bonds 1961 to 1964 - John Kennedy

1962

1963

1964

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1965

30-Year T-Bonds 1965 to 1968 - Lyndon Johnson

1966

1967

1968

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1977

30-Year T-Bonds 1977 to 1980 - Jimmy Carter

1978

1979

1980

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1993

30-Year T-Bonds 1993 to 1996 - Bill Clinton

1994

1995

1996

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1997

30-Year T-Bonds 1997 to 2000 - Bill Clinton

1998

1998

1999

Although the composite chart of long-term rates seems to have followed the typical Democratic pattern, during four of the seven years rates dropped pretty drastically during the first year. Of the remaining three years, the terms of Lyndon Johnson and Jimmy Carter were the only two that actually followed the typical pattern. But overall, rates usually move from lower to higher. When President Bush left office, interest rates were very near the lows of each of his two terms. Now that Barack Obama has been elected, theres a very good chance that rates will follow a similar pattern to those of previous Democratic Presidents. During 2009, interest rates will probably drift slightly lower. From there, the typical Democratic influence on the U.S. economy should push rates higher through 2012.

As a futures trader, the best way to take advantage of the typical Democratic pattern is to trade T-Note, T-Bill and T-Bond futures. But keep in mind, when interest rates go up, these futures markets do the opposite, they go down.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2009

Interest Rate Futures for a Typical Democratic Presidential Term

2010

2011

2012

During President Obamas first year in office, interest rate futures markets will probably trade higher, at least through June or July. But starting in late 2009, the potential trade of a lifetime should cause these markets to decline by as much as $20,000 to $30,000 per contract.