JPMorgan Team Watching for Signs Inflation Is Riling Traders

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The link between stocks and bonds is the “most important indicator” in global markets right now and shows investors aren’t yet worried about inflation getting out of control, according to strategists at JPMorgan Chase & Co.

The fact that short-term correlations between the two have not spiked, even as inflation expectations increase, suggests traders are not yet concerned about the negative impact of price rises, a team including Mixo Das wrote in a note Monday. A high-frequency measure of 72-hour correlation between S&P 500 futures and 10-year Treasury equivalents stood at minus 0.35 on Monday, up from minus 0.57 at the end of January, according to calculations by Bloomberg.

JPMorgan Team Watching for Signs Inflation Is Riling Traders

“A high/positive correlation shows markets are either driven by inflation concerns or changes in policy reaction,” Das wrote in emailed comments. “For instance if inflation was high and rising, bond yields would rise and equities would fall on expectations of tighter policy.”

The pace of U.S. inflation implied by the bond market has accelerated to the fastest since 2014, as crude oil prices rallied along with rising expectations for an economic recovery.

The S&P 500 has risen over 3% so far this year and closed at an all-time high Friday, as investors warmed to the so-called reflation trade. The benchmark Treasury yield has climbed about 27 basis points to just under 1.20%.

A high correlation between stocks and bonds means the latter are no longer a hedge for equity moves, which could impact portfolio allocations, Das said. It also means cross-asset portfolio volatility is rising, which would cause volatility-targeting portfolios to reduce leverage, he said.

”If the correlation sustains positive, it will be quite negative for markets,” Das wrote. “Much more so for bonds, but also for equities as leverage levels will need to come down.”

©2021 Bloomberg L.P.

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