Sunday, January 20, 2019

Bond Yield Correlation And Use Of Macroeconomic Data

With the bond yield talk recently, I had done up a simple statistical research on the relationship between the United States (U.S.) 10-year treasury yield and our Singapore Government Securities (SGS) 10-year bond yield. Using annual average yields between the years 1998 and 2018, here are the results in Fig.1:

Fig. 1 – Annual average yields of U.S. 10-year treasury and SGS 10-year bond between 1998 and 20181,2.

Looks closely related, doesn’t it? To give the relationship a number, I had derived the correlation between them with all the data available, and that is 0.799.

So what does this mean? Statistically speaking, the U.S. 10-year treasury yield and the SGS 10-year bond yield are quite correlated with each other (close to 1.0), meaning that there is a positive relationship between them, though I have to stress that correlation does not imply causation.

So In What Way These Data Are Useful?

According to the Bedokian Portfolio’s fundamental analysis model, such macroeconomic data belongs to the economic conditions tier3. While all these data can be overwhelming, we can classify them as general knowledge that can be fetched from the back of our brains in an instant.

For example, it is known that the US Dollar and gold have an inverse relationship, so when the price of gold goes up, we will know that the value of the US dollar will go down, and vice versa. Using the bond yield example, we can assume statistically, if we see a rise in U.S. 10-year treasury yield, we are expecting to see a rise in the SGS 10-year bond yield as well.

Though this “instant general knowledge” is useful, we have to take note of two related issues. The first is confirmation bias, which is interpreting information that confirms one’s preconceptions. A good way to mitigate this bias is to update yourself with new data, so as to check the relevancy of your general knowledge.

The second issue will be the ceteris paribus clause, which means “other things equal” in Latin. You could find out more on ceteris paribus in my post here.

1 – Macrotrends. 10 Year Treasury Rate – 54 Year Historical Chart. https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart (accessed 19 Jan 2019)

2 – Singapore Government Securities. SGS Prices and Yields – Benchmark Issues. https://secure.sgs.gov.sg/fdanet/BenchmarkPricesAndYields.aspx (accessed 19 Jan 2019). 1998 is the earliest data available for the 10-year bond yield.

3 – The Bedokian Portfolio, Chapter 11 – Fundamental Analysis