Using Correlations to Quantify the Effect of Rising Rates


Chartists can use the Correlation Coefficient to understand the relationship between Treasury yields and certain groups, such as banks, utilities and REITs. The chart below shows the 10-year Treasury Yield ($UST10Y) in the main window and seven correlations in the indicator windows. I am using weekly data, a 13-week Correlation Coefficient and a 26-week EMA for further smoothing. This extra smoothing is because I am simply trying to determine the general tendency. This is clearly not a trading vehicle, but rather an observation to be considered along with the price chart for each ETF. A positive correlation means the group tends to rise when the 10-yr yield rises. A negative correlation means the group tends to fall when the 10-yr Yield rises. 

As the chart shows, the S&P 500 SPDR (SPY), Finance SPDR (XLF), Regional Bank SPDR (KRE) and Broker-Dealer iShares (IAI) are positively correlated to the 10-yr yield. This means they tend to rise when the 10-yr Yield rises and fall when the 10-yr yield falls. An uptrend in the 10-yr Yield, therefore, would be positive for the broader market, banks and brokers. On the other side, utilities, REITs and consumer staples are negatively correlated with the 10-yr Yield. This means they tend to rise when the 10-yr yield falls and fall when the 10-yr yield rises. A rising rate environment would be negative for utilities, REITs and consumer staples. 

Thanks for tuning in and have a good weekend!
--Arthur Hill CMT

Plan your Trade and Trade your Plan

Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
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