Since the financial crisis, the correlation between treasuries and many credit assets such as high yield bonds (HY) has been strongly negative. With rates at extraordinarily low levels, HY price movements were driven mostly by spreads. When treasuries rallied it usually meant that something "scary" was going on. During these periods credit spreads would widen (more than rates fell) and HY bonds would sell off. When treasuries sold off, it meant the market perceived some relief to whatever problems we were facing, and HY bonds would rally. These market dynamics created a pattern of negative correlation.
Recent events however broke that pattern. We've had a number of days with both the longer dated treasuries and HY selling off. That means the HY asset class is now responding to rate moves (not just spread). The 3-month correlation between prices of longer dated treasuries and HY bonds is nearing zero. This move toward a "less negative" correlation with treasuries is also visible in other credit assets as well. Sub-investment-grade credit investors are all of a sudden paying much closer attention to rates.
SoberLook.comFrom our sponsor:
