US Rates Correlation Monitor – Yield Curve And Inflation Expectations Correlations At Extremes

Here are the main changes on the week:

• Front-end yields (3m,2yr) have become less correlated with the front-end of the curve, while the back-end of the curve (10s30s) is correlating more.
• Inflation expectations (5y5y) and bond market volatility (MOVE) have seen correlations with yields inch higher. US 5s10s are correlating most with US 5y5y and the association is at its highest historical level (Chart 1). Correlation between 2yr yields and MOVE is also relatively high.
• Equities, VIX and credit continue to be broadly uncorrelated with yields. Correlations have moved away from August extremes (Chart 2).
• The biggest changes this week were between yields and FX markets. Correlations between yields and USD/EUR developments have turned less negative. Meanwhile, USD/JPY and front-end yield correlation remains positive and within historical ranges.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

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