Wednesday, November 6, 2013

"Correlation Study of Treasury Yields Vs. Stocks and Sectors, $SPY, $IYR"

From Risk Reversal:
The U.S. 10 year Treasury yield peaked in early September, after rising most of the summer in anticipation of the Taper.  The No Taper announcement on the Sept FOMC broke the multi-month uptrend in U.S. Treasury yields.

The 10 year yield is around 2.65% this morning, vs. a peak of about 3% in September.  The 2.5% is the obvious level to watch on the 10 year yield, and importantly, it was not breached on the most recent decline in yields.

Stocks have clearly been reacting to moves in rates.  The correlation between the 10 year yield and the S&P 500 has flipped in the past 6 months:
20 period correlation between S&P 500 and the 10 year Treasury yield, Courtesy of Bloomberg
20 period correlation between S&P 500 and the 10 year Treasury yield, Courtesy of Bloomberg
However, it’s worth noting that yields are substantially higher and the S&P 500 is also substantially higher in the last 6 months.  How does that add up with the negative correlation?...MORE