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>>>Long-term yields lead the game – the mid-term view

22 September 2016

Long-term yields lead the game – the mid-term view

Emmanuel’s post earlier this week (Long-term yields lead the game – the short term view) suggested we might have a game changer in asset class correlations. An early warning signal of the repricing of equity and bond risk premia?

Our quantitative research team has linked this to a forward-looking indicator they follow: the correlation surprise indicator (*)? It captures the magnitude and speed of unusual asset behaviour (ie. sudden divergence of correlated assets, and convergence of uncorrelated assets).

The graphs below show the 200 days rolling returns correlation between US equity and US 10Y bonds, as well as the level of correlation surprise:

Applied to equities and bonds, every historical increase in correlation surprise was followed by increasing correlations..

Now what?