US Rates Correlation Monitor –Yield Curve Correlations To Credit Are Dropping

Here are the main changes on the week:

• Front-end yields (3m, 2y) have become less correlated to longer-term yields (30y) and the curve. Meanwhile, correlations between 10s30s and the rest of the curve have increased. These correlations are within high historical ranges (Chart 1).
• Furthermore, real yields (5y TIPs) and inflation expectations (5y5y) have also become less positively correlated with nominal yields, while correlations with the back-end of the curve have become stronger in a more negative and more positive direction, respectively.
• Yield curve correlations have moved most significantly with credit (CDX), equities and volatility (VIX). The WoW changes mean correlations are less pronounced in the direction of risk-on equalling higher yields (i.e. up days in stocks = higher yields). These movements are evident in Chart 2.
• On FX, co-movements between the yield curve and USD/JPY have become less pronounced – correlations between the two are now weakly positive. Finally, correlations between oil and nominal yields have moved higher, while correlations with the back-end of the curve have fallen. Gold correlations to the curve have also become less negative.

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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