After a glimmer of hope at the end of last week, bonds are back to their old tricks. Actually, they only have one trick recently: selling-off at a faster pace than expected. A far more massive sell-off in UK bond markets continues to be a thorn in the side for US bonds. This is one of the only redeeming factors actually: the fact that US bonds are “only” up 10bps while UK yields are up more than 30. MBS are less impressed as their custom is to underperform amid heightened volatility.
Why are we talking about UK bonds all of the sudden?
First off, the size of the sell-off in UK bonds is worth some attention regardless of the correlation with US bonds. For instance, we’ve discussed Turkish Lira once or twice when it was moving enough, simply because the movement was so big (even though it arguably wasn’t a big deal for US bonds). But in the case of the UK bond market, there can hardly be an overseas bond market with more correlation with the US. Were it not for Brexit and the Trump presidency coinciding in 2016 (downward pressure on UK yields due to uncertainty and upward pressure on US yields due to Treasury issuance implications from tax bill), these two lines would look like best friends for the past 30-ish years:
With that historic level of correlation understood, it’s potentially encouraging that US yields have managed to avoid breaking Friday’s highs considering the additional weakness in UK bonds today.