Global Asset Returns Have Rarely Been More Correlated

As the Federal Reserve begins to wind down its balance sheet, and normalize monetary policy, the world is watching to see if the world’s leading central bank can successfully untangle itself from the largest monetary policy experiment in history. And as Janet Yellen begins normalization, “global asset returns and global asset implied vols have rarely been more correlated with changes in the US 10Y nominal rate” according to Bank of America’s Global Equity Derivatives research team.

Global Asset Returns Have Almost Never Been So Correlated

According to a research report from BoA's Global Equity Derivatives research team published earlier this week, global asset returns, and in particular US rate sensitive assets such as Financials, Utilities and Staples, have seen correlations with the 10-year Treasury rise in recent months. Specifically, for all three equity sectors mentioned above, the "most recent 3-month correlation with the 10Y treasury future has exceeded the long-run measure in absolute value." For example, the correlation between the 10Y and US Financials has risen from around -0.55 over the past two years, to -0.75 in the last three months.

This trend is not just present in US assets. The correlation between the 10Y and EU Financials has risen in a similar way to their US peers. As BoA explains:

"There has been a significant increase in correlations between US 10Y treasuries and global rate-sensitive assets over the past 3M versus the prior 2Y. For our universe of assets, correlations have gone up on average by 0.15 points for those positively correlated with treasuries. Gold, JPY, 10Y bunds and 10Y JGBs, as well as US and EU IG credit, stand out as their correlation with rates is near all-time highs. Also notably, the correlations with US and EU Financials have become more strongly negative."

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With correlations standing at record levels, the best way to play higher rates could be via Financial stocks. BoA's analysts calculate that a 10bp increase in the 10Y rate would translate on average to a 1.6% gain for Financials and a 0.9% loss for Utilities. Energy, Telcos, and Industrials could also benefit.

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