The dance between stocks and bonds is starting to shift — and that could mean investors will have a way to play defense again.
For some time now, stock and bond prices have moved together at a steady pace. When bond yields go up, their prices go down, and that’s been the case for most of the past year. from
Standard & Poor’s 500
An all-time high in early January 2022 to a bear market low in early October, the 10-year Treasury yield nearly doubled to nearly 4%, causing stock and bond prices to plunge. the
SPDR S&P 500 ETFs
(SPY) is down 18% including reinvested dividends, while
iShares 20-year Treasury bond fund
(TLT) decreased by 31%.
But the relationship between stocks and bonds is beginning to change. In recent weeks, stocks have fallen, as have bond yields, meaning that bond prices have been on the rise. The S&P 500 has fallen since its close on March 9, as banking problems started hitting the wires. At that time, the 10-year yield fell to just under 3.5%, from roughly 4%.
There is a good reason for that. The risk reflected by the markets is that banking problems, if they continue, will hit the economy, and ultimately corporate earnings. This is why market participants sell riskier stocks and rush to government bonds for safety, a classic “risk off” market.
“Systemic events of the past two weeks have ‘flipped the scenario,’” wrote Julien Emmanuel, Evercore strategist. “We are back, for the time being, to ‘risk/non-risk’.”
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Another way to look at the markets is just by noticing the same correlation of stocks and bonds. Last year, the S&P 500’s correlation with the price of the iShares 20+ Year Treasury Bond ETF reached its highest point since 2005, according to DataTrek. Now, the correlation shows that the prices of bonds and stocks are starting to move opposite to each other.
“Stocks and long-term Treasurys should start decoupling here,” DataTrek analysts wrote.
While risks for stocks are mounting, bonds must be able to perform their historic mission of providing safety. Can we really ask for anything else?
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Write to Jacob Sonenshine at [email protected]
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