Correlation of 10-Year Treasury Yield with the Nikkei

David Rosenberg, chief economist for Gluskin Sheff (Toronto), had an interesting graph the other day showing how well the yield of the U.S. 10-year Treasury bond tracked with the Nikkei 225 index (Japan).

This is an excellent example to show how widely correlations can vary between different time periods.  The data has been analyzed year by year since (and including) 2004 through August 26, 2010.  The results are displayed in the following graph:

There are several things to note:

1.  Even though the correlation over the entire time period is borderline good, there have been years when the correlation has been weak, poor and even negative.

2.  The average of the correlations for the component time periods is much different than the correlation over the entire time period.

3.  The strongest correlations have occurred in three of the last four years.

4. The strongest correlation has occurred thus far in 2010.

The behavior of this correlation over the last seven years is a good example of why correlations must be tracked if one is depending on them for risk reduction in asset allocation.  As many EMH (efficient market hypothesis) and MPT (modern portfolio theory) practitioners can attest, setting up a portfolio based on a pattern of correlation and letting it ride can sometimes produce very unexpected results.

Note:  The author’s definitions of correlation quality are defined here.

Share this Econintersect Article:
  • Print
  • Digg
  • Facebook
  • Yahoo! Buzz
  • Twitter
  • Google Bookmarks
  • LinkedIn
  • Wikio
  • email
  • RSS
This entry was posted in Business News and Analysis and tagged , , , , . Bookmark the permalink.

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.