Dollar Correlation to Global Bonds

The following table shows correlations of UUP, the US Dollar Bullish ETF, to five different fixed income ETFs over the past 18 months. The ETFs selected are BWX (International Treasury Bond), WIP (International Government Inflation Protected Bond), IEF (7-10 Year US Treasury), TIP (US Inflation Protected Bond) and PCY (Emerging Market Bond).

A brief definition of correlation from assetcorrelation.com:

Correlation is a statistical measure which indicates the degree to which the prices of two assets move together. Correlation between two stocks is 1.0 when the prices of the two stocks move completely in tandem. It is -1.0 if the price of stock A always goes up when the price of stock B goes down. Correlation is 0 if the two stocks move completely independently of one another

What can the table below tell us? Depending on your view of the US Dollar, you could stand to profit with a position in BWX or WIP if you believe the high negative correlation will continue. The trend has been negative of late on the US dollar and the technicals don't show a sign of breaking yet, according to Adam Hewison. Thus, WIP and BWX may be worth a close look in portfolios with fixed income allocations.

Since 2008-03-19. Custom Correlation Matrix

The following table shows return correlations between the assets you entered for the past year and a half.

			UUP	BWX	WIP	IEF	TIP	Return	StdDev
	Ps Db Usd Idx Bl	UUP						0.6%	0.8%
	Spdr Barclay Intl	BWX	-0.64					2.5%	0.9%
	Spdr Db Int Gov B	WIP	-0.56	0.64				-3.1%	1.1%
	Ishares Barclays	IEF	-0.09	0.25	0.04			1.9%	0.6%
	Ishares Barclays	TIP	-0.25	0.40	0.36	0.64		-1.7%	0.7%
	Powershares Emerg	PCY	-0.15	0.12	0.23	-0.02	0.12	8.0%	2.7%
	Portfolio							1.4%	0.6%

The chart below gives a good visual representation of the correlation among the above ETFs. The international ETFs are charted behind UUP with IEF, TIP, and PCY below UUP:

Disclosure: no disclosures

Comments

[Mad Hedge F...:]

nxc A number of readers have asked me to come up with a safe, high yielding investment in which to hide out in case the equity markets swoon again. That means they are looking for a security that offers a high fixed return, denominated in a strong currency that will benefit from future upgrades that will boost the principal over time. All of that is another name for the Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY). The fund has 40% of its assets in bonds issued in Latin America and 31% in Asia, with the bulk of the maturities exceeding ten years. The two year old fund now boasts $340 million in market cap and pays a handy 6.42% dividend. This beats the daylights out of the nine basis points you currently earn for cash, the 3.40% yield on 10 year Treasuries, and still exceeds the 6.42% dividend on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single “A” US corporates. The big difference here is that foreign bonds are issued in strong foreign currencies instead of weak dollars, and have a rosy future of further credit upgrades to look forward to. It turns out that many emerging markets have little or no debt because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in Brazil and Argentina in the seventies and eighties is at the back of their minds. With US government bond issuance going through the roof, the shoe is now on the other foot. A price appreciation of 125% over the past year tells you this is not exactly an undiscovered concept. Still, it is something to keep on your “buy on dips” list.

Sep 21 11:42 PM

[twitee:]

PCY will crash again, if the equity market make the anticipated correction. We live in a globally interconnected market, with the fall of the dollar all other currencies will correct accordingly. There is no safe currency but hard assets such as housing, gold or any other hard asset.
Stay away from the manipulated unpredictable equities just to collect a 6-10% dividend........Some ETF that are invested in hard assets like URE, GDX, GLD, SLV will have much better payout if their asset are really backed up by real assets!!!!!!!!!

Sep 22 05:16 PM

[Bob Mayo:]

PCY is in dollars. From the ETF summary: "The Index tracks the potential returns of a theoretical portfolio of liquid emerging markets U.S. dollar-denominated government bonds issued by approximately 22 emerging-market countries."

PIMCO Emerging Local Bond Fund, a mutual fund, might be a better choice, as are BWX, BWZ, WIP, and CEW, if you seek investments denominated in other currencies.

Oct 03 01:48 PM

[Bob Mayo:]

...which brings up an interesting point. With so much emerging market debt issued in dollars, if the dollar declines EM countries get their debt reduced, in effect. That should stimulate EM growth even further.

Oct 03 01:52 PM