Correlation with Bond Yields

Hat tip to Gökhan Kula for sending this along.  For the few years I have been trading, bond yields have been strongly correlated with stocks.  Stocks go up when bonds go down, so much so that I regard SPY and TBT as the same play.

I have the following chart in my collection on, just in case the correlation should someday break.  That seems to be happening now, with post-QE yields headed toward 3%.

TNX CorrelationMy chart, below, recapitulates the analysis of J. P. Morgan.  It shows the rolling two year correlation of weekly S&P 500 returns with weekly changes in the 10 year Treasury yield, plotted against the  Treasury yield.

SPX TNX CorrelationThis is the correlation of correlation, so to speak, with bond yields.  You can see that the strong correlation, to which I am accustomed, becomes weaker and then negative as yield rises through 5%.  Of the 2,700 or so datapoints, only 415 have TNX < 4.0, so this low yield is an historical anomaly.  Here is the timeline (note the log scale).

TNX LifeSince 2008, the correlation has seldom been below 0.4, and often as high as 0.7.  Here’s what that has looked like in terms of weekly returns.

Scatter3For comparison, here is that ancient period when stocks and yields were negatively correlated – or, to put it another way, stocks and bonds rose and fell together.  Don’t ask me what asset class funds flowed to when both were down.  Cash or real estate, I suppose.


This entry was posted in Economics and tagged , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s