Bonds Are Hinting They’ll Hedge Stocks Again as Growth Bets Ease
(Bloomberg) -- The furious rally in Treasuries has rekindled a decades-old relationship between stocks and bonds that’s at the heart of basic diversification strategies used by countless investors.
The 20-day correlation between futures for the S&P 500 and Treasuries turned negative for the first time since February, according to data compiled by Bloomberg. While longer-term measures remain positive, it signals a reversal in the recent trend.
The two assets have been increasingly moving in lockstep in past few months, and the link between them jumped to a 2005 high earlier this year. It all stirred anxiety that bonds would fail in their traditional role of protecting portfolios from stock declines.
The yield on 10-year U.S. notes closed 8 basis points lower, taking its drop to more than 17 basis points since the start of last week.
“While the S&P 500 was charging to successive new highs last week, Fed Funds Futures and Treasuries were beginning to flash a yellow light,” Nicholas Colas and Jessica Rabe of DataTrek Research wrote in a note. “It’s too early to call this a full-blown ‘growth scare,’ but we think it’s important that these two markets are less convinced of a 2022 Fed policy shift now than just six trading days ago.”
Read more: HSBC’s Major Joins Bond Bulls in Calling Time on Reflation Trade
While the correlation is declining, the latest Treasury rally hasn’t coincided with a stock selloff -- good news for portfolios using both. The $1.3 billion RPAR Risk Parity exchange-traded fund (ticker RPAR) hit a fresh record Tuesday. DFA’s Global Allocation 60/40 Portfolio is also near its all-time high.
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