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There’s a big round-trip in US yields over the past week, and here’s how correlations have shifted:
- Last week, we flagged that the front-end of the US curve was coming to life and now we see a big increase in correlations between 2s5s and the levels of yields. A week ago, the 2y had a 30% correlation with 2s5s, now it has a 65% correlation. Also, rates vol has become more correlated with the curve, but I suspect that the Fed meeting will kill volatility, so correlations should start to fall.
- Another shift has been that the curve from 5y onwards, e.g. 5s30s, is now negatively correlated with inflation expectations. The correlation with equities and the curve has also inverted, so higher stocks = flatter curve. However, bond yield levels are still positively correlated to stocks.
- Finally, dollar correlations with yields have fallen.
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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