The correlation between stocks and bonds has surged to its highest (and positive) since the peak of the stock market in 2007…
Today’s environment is not normal – it has been 9 years since bonds and stocks moved in sync, completely confused. That time it did not end well… but this time is different, right?
As The Wall Street Journal notes, bonds and stocks have both gotten clobbered in recent days, reversing the traditional relationship between the two in a way that’s only happened during shifts in Federal Reserve policy over the past decade.
Many associate a rising stock market with falling bond prices, and vice versa, since an improving economy that boosts shares can lead investors to demand fewer safe bonds like U.S. Treasurys. But that flipped very sharply during this most recent selloff, with falling stocks coinciding with falling bonds.
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That’s showing up in the correlation between the S&P 500 index and 10-year Treasury yields. The one-month rolling correlation between the two was at minus-0.59 on Tuesday, suggesting falling equity prices coincide with higher yields and lower prices. The correlation is the most strongly negative since 2007, and a swift reversal from more than 0.80 in the wake of Britain’s vote to leave the European Union, according to data from Credit Suisse equity derivatives strategist Mandy Xu.
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But over the past decade, the only times the correlation between stock prices and bond yields became so negative in such short order were during shifts in Fed policy. A similar spike happened in December of last year when the Fed first lift interest rates, as well as in December of 2013 when the Fed started trimming its bond-buying program, according to to Credit Suisse.
Other such spikes came when the Fed started buying bonds in November 2010 and in July 2007 when the central bank started easing monetary policy as the financial crisis began.
And the chaotic correlation surge has sparked the biggest drop in Risk Parity funds since August 2015’s crash…
At the same time, breadth in the market is notably weakening… which has not ended well before…
Finally we leave it to David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, to sum up the market currently…
“How to describe the current market backdrop? In a word: jitters,”
Charts: Bloomberg
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