Super Bowl: Does football predict the bond market?

The Super Bowl Indicator holds that a win for an NFC team heralds a bull market in shares and an AFC win a bear market. It is among Wall Street's most durable bits of folklore. With ten-year Treasury yields hovering around 4.2 per cent, bond traders can be forgiven a break from debt arithmetic for some light superstition.

This year's game in Las Vegas pits the Kansas City Chiefs of the AFC against the San Francisco 49ers of the NFC, so the folklore at least offers a clean binary. Its recent form is poor. Last February the Chiefs beat the Philadelphia Eagles, an AFC win that should have spelt a grim year for shares, and the S&P 500 went on to gain about 24 per cent in 2023.

Where the folklore came from

The indicator was popularised in the late 1970s by a sportswriter, after a run of years in which it seemed to work. Its rules were later stretched to keep it alive: teams that had belonged to the old National Football League before the 1970 merger count as NFC teams even when they play in the AFC, so a win for the Pittsburgh Steelers counts as bullish. Adjustments of that kind are a classic sign of an overfitted rule. When a pattern fails, its defenders redefine the inputs until the record looks respectable again.

Four months of real signals

Bond traders have had no shortage of genuine material since the autumn. Ten-year yields touched 5 per cent in October for the first time since 2007, as investors balked at heavy issuance and demanded more pay for tying money up for a decade. Fitch had already stripped America of its AAA rating in August, citing fiscal strain and repeated fights over the debt ceiling. Yields then slid below 4 per cent by December, after the Treasury slowed the growth of its longer-dated auctions and Fed officials pencilled in three rate cuts for this year.

The climb back to about 4.2 per cent owed nothing to the gridiron. January payrolls rose by 353,000, far ahead of expectations, and Jerome Powell used his press conference at the end of January to signal that a cut in March was unlikely. Each of those shifts moved the curve within minutes of the news, which is more than any touchdown has managed.

Football is no guide to yields

Bond prices are set by the supply of government debt and by how central banks respond to the data. Gridiron results do not come into it. Spurious correlations thrive when the economy is shifting and models struggle to pick out real signals. Using sports results to predict term premia is an amusing parlour game. Investing money calls for a close look at fiscal deficits.

The statistics explain why the parlour game keeps finding players. Screen enough unrelated series against enough years of market returns and some will line up by chance; one quant made the point by showing that butter production in Bangladesh tracked the S&P 500 over his sample. The Super Bowl Indicator has one observation a year and no mechanism linking a final score to the price of money. Patterns of that kind are usually spotted only after a lucky run, and they tend to decay once people notice them.

The same problem afflicts serious research. Academic finance has produced hundreds of supposed predictors of returns, and studies that re-examine them find that many vanish out of sample or after publication. The standard response is to demand much stronger statistical evidence for any new signal and, above all, a plausible economic reason why it should work. The Super Bowl Indicator fails both tests at once, which is what makes it useful as a teaching example.

Where the supply comes from

The mechanism that does move yields runs through the Treasury's financing needs. The federal deficit came to about $1.7 trillion in fiscal 2023, and every dollar of it has to be sold at auction to someone. With the Fed shrinking its balance sheet by letting bonds mature without reinvesting the proceeds, that someone is increasingly price-sensitive: pension funds, foreign reserve managers, hedge funds and households buying bills. When auction sizes grow faster than their appetite, dealers absorb the excess and yields rise until fresh buyers appear.

The folklore's defenders have one fair point. Markets run partly on mood, and a story that many traders know can shift money for an afternoon. That is an argument about sentiment on a single Monday, though, and it says nothing about where ten-year yields settle over a year in which Washington must refinance a record stock of debt.

What would move the curve

The indicators worth watching are dull but decisive. The Treasury said at its January refunding that it did not expect to raise the size of its regular coupon auctions for at least the next several quarters, so any change to that guidance at the next refunding would matter. So would the Fed's March meeting, where new projections will show whether officials still expect three cuts, and each month's inflation report. A weak reception at a ten-year or thirty-year auction would say more about term premia than any Sunday night in Nevada.

The nearest test arrives two days after the game, when January's consumer-price figures are published. January has a habit of running hot as firms reset prices at the start of the year, and a firm reading would push back the date of the first cut further. That report, and the auctions that follow, will decide whether the ten-year drifts back towards 4 per cent or climbs further.

The Super Bowl Indicator is harmless fun. For the bond market this year, the Treasury's auction calendar will matter far more than the final score, and whoever lifts the trophy in Las Vegas, yields will answer to Tuesday's inflation data.