The dance between stocks and bonds is starting to shift — and that could mean investors will once again have an opportunity to defend themselves.
Stock and bond prices have been moving in lockstep for some time. When bond yields rise, their prices fall, and this has been the case for much of the last year. From the S&P 500’s all-time high in early January 2022 to its bear market low in early October, the 10-year Treasury yield roughly doubled to nearly 4%, sending both stock and bond prices plummeting. The SPDR S&P 500 ETF (SPY) fell 18%, including dividends reinvested, while the iShares 20+ Year Treasury Bond ETF (TLT) fell 31%.
But the correlation between stocks and bonds is starting to change. In recent weeks, stocks have fallen, but so have bond yields, which means bond prices have risen. The S&P 500 is down a hair’s breadth from its close on March 9, just as banking troubles were beginning to hit the wires. During that time, the 10-year yield has fallen from just under 4% to just under 3.5%.
There’s a good reason for that. The risk that markets are reflecting is that if banking problems persist, they will hit the economy and ultimately corporate earnings. Because of this, market participants are selling riskier stocks and rushing into government bonds for safety, a classic “risk-off” market.
“The systemic events of the past two weeks have turned the script around,” wrote Julian Emanuel, Evercore strategist. “We’re back to ‘risk on/risk off’ for now.”
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Another way to look at the markets is to observe the correlation between stocks and bonds for yourself. Last year, the correlation of the S&P 500 with the price of the iShares 20+ Year Treasury Bond ETF reached its highest level since 2005, according to DataTrek. Now, the correlation shows that bond and stock prices are starting to move in opposite directions.
“Equities and long-dated Treasuries should start decoupling here,” DataTrek analysts wrote.
As risk for stocks increases, bonds should be able to perform their historical role of safety. Can we really ask for more?
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Write to Jacob Sonenshine at [email protected]