Explaining low government bond yields (follow up) – maybe it’s not just about Europe, it’s about China too

Yesterday I wrote a comment about how US Treasuries seemed to have decoupled from US economic data, and decided that it must be all about Europe (see here).  That could have been a slightly hasty conclusion.

Having spent the last few minutes messing around with Treasury correlations, I was surprised to find just how closely correlated US Treasury yields have been with Chinese equities since the beginning of 2009.  Mounting fears about the extent of the slowdown in China saw the Shanghai Composite Index hit the lowest level since March 2009 last week.  It’s also interesting to note that while Eurozone economic data has stabilised and US economic data has massively surprised on the upside, Asia Pacific as a region appears to be getting worse.  The Citigroup Economic Surprise Index for Asia Pacific shows that data in the region is currently underperforming analyst expectations by the most since the end of April 2009.    For those interested, Paul Krugman wrote an interesting piece on the deteriorating picture in China in the New York Times earlier this week (see here).  As Krugman rounded off in his piece, the last thing the world economy needs is a new epicentre of crisis.

Alternatively, if you want to see an argument about why economic surprise data is meaningless then see here.

5 thoughts on “Explaining low government bond yields (follow up) – maybe it’s not just about Europe, it’s about China too

  1. A) Agree with the first comment

    B) 1st rule of correlations: CORRELATION DOES NOT IMPLY CAUSATION

    C) Pretty sure S&P 500 is 90%+ correlated with Chinese equities. S&P is also highly correlated with Treasury yields…but again, doesnt mean any of those drive each other.

    D) UST’s have decoupled from economic data because of safety flows due to Europe while equities have been in their own world.

    • About what Econ O’Mist in point C, it is a phenomena called ‘spurious regressions’ (the most well-known paper about it is from Granger).

      Many financial time series show very high R^2 (correlation) if you use simple regressions, but you need to test for causality.

      In your article, I think you need to add more historical data and show that the correlation has gone higher than int the previous historical period ?

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