US Rates Correlation Monitor – Yield Curve Correlating With MOVE And TIPS

Here are the main changes on the week:

• Front-end yields (3m,2yr) have become more correlated to the back-end of the curve. Yield curve correlations are within their highest historical ranges, especially correlation between 10s30s and 5yr (Chart 1). Correlation between the front- and back-end of the curve (2s5s, 10s30s) also increased.
• There were sizeable changes in correlations between nominal and real yields. Front-end nominal yields became less correlated with 5yr, 10yr TIPS, while the yield curve has started to moved more closely with real yields.
• Inflation expectations and bond market volatility (MOVE) have also seen positive correlations increase, in particular with shorter-term yields. Yields are not, however, correlating with equities, credit or VIX (chart 2). This is also the case for changes in oil and yields.
• The biggest moves were between yields and FX markets. Correlations between front-end yields and USD/JPY developments have turned significantly more positive. Meanwhile, USD/EUR and USD/CNH movements have become less negatively correlated with yields and the curve.

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.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)