Cross-asset correlations are breaking down as bonds respond more to geopolitical risk and inflation than to traditional US economic signals. According to Kathryn Kaminski of AlphaSimplex, short-term bonds are now more closely correlated with energy than with equities. The yield on US 30-year bonds reached 5.216% at Thursday’s auction, the highest since 2001. The S&P 500 hit another record on Thursday, while equities and commodities are providing the strongest trend signals. Bond markets are already pricing in increased downside risk due to their greater sensitivity to inflation uncertainty.
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