Global markets tremors continue to escalate on Wednesday as bonds and rate sensitive sectors plunged after the Fed revealed it was open to June rate hikes. Marketwatch posed the critical question: Could this post-Fed bond selloff be a repeat of ‘taper tantrum’ which saw 10 year Treasury yields jump 140 basis points in 4 months?
Our cross asset FNA Correlations map in Fig 1 ranks Wednesday’s top surprises, with Corporate Bonds and EMBI plunging by over 2.7σ. Given key tail risks global investors are increasingly worried about, credit sensitive assets are especially vulnerable. Furthermore, emerging markets and commodities could quickly give up recent gains with continued USD strength.
Fig. 1. Cross asset FNA Correlations map ranking outliers on 18 May.
US government bonds remain most reliable global safe haven asset
Although US government bonds fared poorly on Wednesday, their insurance value makes them valuable safe haven assets for global investors. US government bond to equity correlation remains reliably elevated at -.7 (strongest link to Financials indicated by red link). Fig. 2 ranks most impacted assets by a -3σ predictive Brexit + China shock, and highlights US 10 & 20+ year government bonds as positive outliers (with VIX)
Fig. 2. Predictive -3σ Brexit & China shock on cross asset FNA Correlations map