"The Only Asset That Matters Right Now" - Treasury Correlations Have Never Been Higher

Tyler Durden's picture

In a week in which there is not one but two critical central bank announcement within hours of each other on September 21 - first the Fed, followed hours later by the Bank of Japan - there is just one asset traders should keep an eye on: the 10Y Treasury.

As Goldman shows, as a result of an unprecedented scramble for duration over the past year courtesy of global NIRP, the sensitivity to bond yields is at its all time highs across all assets, which means whatever the 10Y does, everything else will do, especially as a result of the ongoing rout in risk-parity and systematic funds which create a positive selling (or buying) feedback loop.

For bonds, the beta to US 10-year yields is the most negative since data begins in the mid-1990s: this is a technical effect, as in a negative-rates world most bonds increasingly resemble zero-coupon bonds.

What about stocks? As GS observes, while equity investors also fear higher rates, they are not necessarily negative for equities and risky assets more broadly: this will depend on the speed and driver of rate increases.

Indeed, as we showed previously, in a time when Risk Parity funds have become the marginal price setter across all asset classes, a rapid deleveraging will lead to substantial losses in both bonds and equities.

This is also confirmed at the macro level: historically, with anchored inflation and low bond yields, rises in yields have tended to reflect better growth, supporting equity performance as investors lower the required equity risk premium. However, for this virtuous relationship to hold, growth needs to pick up alongside yields and rate volatility should be low, something we have failed to observe so far in this entire business cycle. If bond yields increase too rapidly, such as during the ‘taper tantrum’ in May 2013, the ‘Bund tantrum’ in April 2015, and the most recent Taper Tantrum II...


... “equities tend to struggle” Goldman concludes.

Which is why in the coming days, traders will have to keep an eye on two key things: not only the yield on long-dated bond yields, which have seen a substantial jump in the past week courtesy of the “chaos unleashed by the BOJ”,  but the speed with which such a repricing takes place.

Finally, as for asses which assets are most susceptible to a sharp move lower following a spike in real yields, Goldman points out that “very few assets are likely to benefit from higher US 10-year real yields currently: the duration is very low/negative compared with the past 10 years due to the search for yield. The Yen and European and Japanese equities are likely to benefit from the underlying policy divergence.”  Here is the full breakdown:

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Hunter S. Thompson's picture

Does the Federal Reserve even matter anymore?

Bank_sters's picture

As Greenspit said, the US can't default because we have a printing press.  Gold smold silver smilver.  Get yerself some fancy paper backed by the full faith and credit of the collateral human property , er, I mean tax reciepts  of the US.   

Wulfkind's picture

Get yerself some fancy paper backed by the full faith and credit of the collateral human property.......


And right there folks....there's the truth.  Bank_sters, you're a genius.  When Central Banks along with Mega-Transnational Corporations and the Governments that protect them rule the world, we are now nothing but slaves on the Global Plantation.

We're nothing but their property.

But please.....don't let that disuade you from voting come November.  I'm sure that will make ALL the difference in the world.

adanata's picture


I dunno... wait'll they introduce 'Fedcoin'.

joego1's picture

will trade farcecoin for buttwipe

Dick Buttkiss's picture

... “equities tend to struggle,” Goldman concludes.

"Equities will collapse," Buttkiss concludes.

buzzsaw99's picture

shift up in us real yields, lulz lulz lulz

ToSoft4Truth's picture

More Section 8 into our neighborhoods while bank executives get millions in bonuses to fortify their neighborhoods. 



wisehiney's picture

Oh Great Bond Trader in the sky, if you must squeeze the long treasury bond yield higher,

I will mercifully relieve them of their burden when they can no longer take the pain.

Thank you for your endless bounty,

Your humble earthly TLT'er.

Youri Carma's picture
Credit Spreads No Longer Narrowing – Bob Hoye https://www.youtube.com/watch?v=qWVOZZd3jaY
jm's picture

Ultimately policy and secured rates will enter a tightening cycle. Until then, these risk adjusted sell offs are merely opportunities for those with balls.

Yen Cross's picture

  The fact that anyone [SNB] to liquidate CHF for their APPL hedge, is pretty funny.

 I'm sure there's some excess Euros in that pot.

unklemunky's picture

Go long LINK cards. They are traded like cash but at a discount. They are directly related to the price of BJs and weed. The LINK/BJW index. As the price of a hummer (bj to the layman) goes up, the value of the LINK card goes down. Econ 101.