This Chart Shows How Everything Is Just One Big Central Bank Trade

One of the biggest themes in global markets is the search for yield.

Government bond yields across the developed world are at or near record lows as central banks continue full-on monetary easing. One major side effect of depressed yields on government bonds has been a flood of money into riskier assets like junk bonds – or Rwandan sovereign debt – from investors looking for interest income.

From a technical standpoint, the flood of money from this central bank-inspired trade has become the overriding factor in some of these riskier areas of the fixed income space, but it’s seeped into equity markets as well as investors pile into stocks that pay big dividends for the same reason.

The chart below from Société Générale further cements this theme.

“It identifies clearly the search for yield in the past three months as a single coherent trade,” says SocGen strategist Sebastien Galy.

The chart is a matrix plotting correlations of various asset returns against each other.

If the returns of any two assets over the past three months are 90% correlated or higher, then that pair of assets shows up as a white dot on the matrix.

(That’s why there is a white diagonal line running down the middle of the chart – any asset paired with itself will obviously display a 100% return correlation.)

What is interesting is what is going on around that diagonal line. For example, in the short-term fixed income space, the returns of all sorts of assets are 90% (or more) correlated with each other. That’s the big square of white dots in the top-left corner of the matrix.

Move further down the diagonal line, and it gets even more interesting.

The MSCI row and the MSCI column denote the equity space. Where the two intersect, there are a bunch more white dots, suggesting that various equity indices have been at least 90% correlated over the last three months.

Move to the left along the MSCI row, though, and you find more white dots where it intersects with the 10-year bonds column. That suggests that several 10-year bonds are highly correlated with several stocks.

Moving along the MSCI row to the right, there are a bunch more white dots that show how highly correlated the MSCI indices are with currencies (in the “FX” column).

So, there it is: one big central bank trade.

Cross-asset correlations

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