Comovements in Global Markets and the Role of U.S. Treasury

Motivated by the observation that the co-movements of global assets in recent decades are largely anchored to the interplay between the U.S. equity market (SPX) and U.S. Treasury (UST), we construct a daily safety measure ηUST for UST, which is the negative of the correlations between the high-frequency intraday returns of SPX and UST. We identify the flight-to-UST episodes as the top 20% ηUST days, which are characterized by sharp declines in SPX, significant rallies in UST, strong appreciation of Yen to USD, large spikes in options implied-volatility, and dramatic flows from SPX to UST. Serving as the destination of safety, the UST specialness widens relative to interest-rate swaps and its normal negative co-movement with USD breaks down. More broadly, the global risk-off captured by the UST safety measure ηUST impacts all major global asset class proportionally, with the high-ηUST day returns of the US fixed income, FX currencies, commodities, international bonds and equities largely determined by their relative safeness against the SPX rather than their own fundamental risk