Comparing The CRB With Bonds
by Jim Bianco, C.M.T.
The Commodity Research Bureau (CRB) price index and the bond market have frequently been
compared in the past because of their interrelated natures. The CRB is considered to be an indicator of
inflation, and changes in the rate of inflation can affect investors' desire to hold bonds. The index, which
tracks 21 commodities, is weighted toward agricultural products (about 62%), and because of its
emphasis on agriculture, some investors tend to disregard it — an error, because the index serves as an
excellent proxy for commodity inflation.
To determine whether the comparison between the CRB and the bond market is viable, to conduct our
analysis, we chose the Chicago Board of Trade continuous bond futures contract as a proxy for the bond
market. This contract was preferable to a total return index because we were concerned with finding
correlations of only price movement.
Figure 1 illustrates the negative relationship between bond futures and the CRB (bottom and top,
respectively); when one goes up, the other goes down. On Figure 2, the actual correlation (a rolling
two-year correlation) between the CRB and the bond contract is plotted above the bond contract. The
results confirm what we would expect from Figure 1; a strong negative correlation exists between the
CRB and bonds. For most of the last eight years, the correlation between the CRB and bonds has been
less than -0.5, meaning statistically, 25% of the movement in bonds can be "explained" by movements in
the CRB. Also note that the same study on the currencies to bonds and the Standard & Poor's 500 to
bonds did not yield results as statistically significant as the CRB-to-bonds relationship.