Positive Stock – Bond Relationship Will Not Persist Forever

July 21, 2011

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Barclay’s

“although the safe-haven correlation between US Treasury yields and risk assets has become one of the more pronounced features of the investment context, it emerged only a decade ago. For decades before then, it was reversed. There is no reason to think that it cannot reverse once more. And a financial market without a large and liquid asset that provides protection against mark-to-market risk would likely be a very different, and scarier, place.

SocGen’s Dylan Grice made the same point earlier this year:

When inflation expectations were (probably) around zero (before the 1960s) the correlation between bonds and equities was zero too. But look what happened during the 1960s when inflation expectations broke (this was during the Vietnam war, as the Bretton-Woods system was coming under pressure and as the bear market in bonds was getting into full swing). The chart shows that the correlation went negative. When bond yields rose equities fell  because government bonds were reflecting the same tensions that were pulling down equity valuations(fear of ever-higher inflation).

HS :

There will be a time when higher yields will be met with lower stocks.

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2011 03 03 Grice-Trying-to-Bullet-proof-Your-Portfolio-1

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