Global Rate Correlation Shows View Central Banks Hunt In Packs

Authored by Ven Ram, Bloomberg cross-asset strategist,

Depending on how you are positioned on rates, there is a virtuous circle - or a vicious cycle - on display in the major global rates markets, with markets feeding off one another.

Correlations between German front-end bonds and comparable Treasuries, usually pretty remarkable, are now close closing in on 0.9.

Which is to say that much of the shift that we have seen in German front-end bonds reflects what is happening across the Atlantic.

That isn’t to say that recent rally in two-year German securities doesn’t have legs.

Between August and the end of November, the markets tried to push the yield on the maturity below 3% several times - and failed at each of those attempts.

But with the disinflationary narrative in the euro zone gaining credibility, the current rally is fully sanctified.

The degree of enthusiasm sweeping through the markets may also be seen in front-end gilts’ correlation with Treasuries, which has shot up from deeply negative levels - when UK and Treasury yields were marching in opposite directions - to around 0.7 now.

Given that the UK has arguably the most deeply embedded and worst inflation outlook among the major markets, one might think that moves in front-end gilts that are in lockstep with Treasuries are hardly justified.

However, there is an underlying message from the markets that speaks to their long-held conviction that central banks hunt in packs, never alone - meaning, should the Fed pivot, so will the European Central Bank and others possibly following in tow.