Bonds Are Useless Hedge for Stock Losses as Correlation Jumps
Treasuries haven’t been this ineffective as a stock hedge since the 1990s.
Historically, Treasuries tend to rally when stocks are tumbling, meaning they are negatively correlated. The idea is a cornerstone of the popular 60/40 strategy that uses an allocation to bonds as well as stocks to reduce the volatility of the overall portfolio.
But the one-month correlation between the Bloomberg US Treasury Total Return Index and the S&P 500 strengthened this week to 0.82. A reading of 1 means bonds and stocks always move in tandem, while -1 means the opposite. Between 2000 and 2021, it averaged -0.3.
The relationship began to flip last year, as the Fed raised rates aggressively to curb inflation, hammering both the fixed-income and equity markets.
The one-month correlation is now at its highest reading since 1996 when low inflation coupled with strong domestic growth led to both asset classes gaining.