Correlations between currency-adjusted returns on the government debt of countries such as the U.S., Japan, the U.K. and Germany are at their highest level in at least seven years
Increasingly, that means investors holding the debt of one country can see their portfolios slammed by market activity at the other end of the globe. A recent example came late last month, when U.S. yields surged along with those on British government debt after the UK’s tax cut plan roiled markets, then declined sharply once the Bank of England bought long-dated UK bonds to restore financial stability and the government reversed its plans.
The lockstep moves are another strike against the market for government debt, often viewed as among the safest of investments. “The high level of correlation across global bond markets means that allocating to ex-U.S. bonds is that much less effective,” said Gregory Peters, co-chief investment officer at PGIM Fixed Income.
Yields on the U.S. 10-year Treasury, for instance, dipped sharply last week after Australia’s central bank delivered a smaller rate hike than expected, with some investors using the move to support the idea that the Fed will eventually follow suit. U.S. bonds tumbled and stocks dropped later in the week, as a parade of Fed speakers hammered home the U.S. central bank’s single-minded focus on inflation while robust employment data bolstered the case for more hawkishness.
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