Rare positive correlation between stocks and bonds in US, China


Aug 29, 2015 (LBO) – A rare positive correlation was seen between equities and bonds this week with China’s equities plunging and demand for 30-year US treasuries falling at the same time.

On Tuesday and Wednesday, when US equity markets were tumbling, demand for 30-year US Treasury bonds fell, the opposite of what happens when investors usually seek a safe haven during a crisis.

The reason was China’s intervention in the foreign exchange markets to prop up the value of the yuan, David Woo, Bank of America Merrill Lynch’s head of global rates and currency research, told Bloomberg TV.

To defend its currency, China sold Treasuries and then exchanged the dollar proceeds for renminbi. This sale of treasuries put upward pressure on US Treasury yields, he said.

China stocks fell almost eight percent during the last week, despite the market closing up 4.8 percent on Friday while the US S&P 500 closed up one percent last week. According to an estimate from Societe Generale SA, the People’s Bank of China has sold at least 106 billion dollars of reserve assets in the last two weeks, including US Treasuries.