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The Correlation Between Equities and Bonds

  • ,  Chief Executive |
  • 08 Oct 2019
  • Updated 09 Oct 2019

The most important number you rarely think about

The correlation between equities and bonds is an important input for asset allocators. For the last 20 years, the correlation between equities and bond yields has been positive (falling stock prices typically coincide with a decrease in bond yields). This has given rise, during the 21st century, to a risk on / risk off mentality, whereby the risk-off (safe-haven) trade is to pull cash out of equities during periods of market turmoil and invest in the bond market. But how reliable is this trade? Not only are bond yields already extremely low, but correlations between these and other asset classes frequently break down during extreme events.    

Are bonds an effective diverisfier for multi-asset portfolios? This depends, in part, on whether the correlations observed over the last 20 years will continue. For most of the 1800s and 1900s, the correlation was actually negative - the reverse of what investors now perceive as normal. So does the correlation between stocks and bonds really matter? During periods of atypical correlations, should investors look towards other asset classes or strategies to provide both income and stability? How have previous inflationary regimes or previous crises affected the correlations between asset classes? Below are some of the best papers on Savvy Investor discussing these questions, as well as others centered around the topic of correlation.


Are rates and equities losing their balance? (MSCI blog, Sep 2019)

For around 20 years, asset allocators have used the relationship of bonds and equities as a natural hedge. In this blog, MSCI looks at their macroeconomic model, examining whether this particular form of risk protection could disappear in a secular shift.

Bonds and equities: a new correlation for a new world order (BNP Paribas AM blog, Jun 2019)

Exogenous events and new technologies are making portfolio allocation decisions more difficult. Instead of merely investing equity gains into bonds during periods of uncertainty, investors may wish to consider other asset classes.

The Stock-Bond Correlation: Where to from here? (Axioma, May 2019)

Axioma focuses in on the correlation between equities and bond yields, reviewing their historical relationship and discussing their more recent convergence.

Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes (revised May 2019)

As a recently amended version of an older paper, this study explores what constitutes an optimal strategic allocation within a portfolio with fewer asset class restraints.

Stock/Bond Correlations: Relationship Troubles (UBS AM, Feb 2018)

UBS examines the long-term relationship between bonds and equities and the drivers of correlations between the two main asset classes.

Does the Stock‑Bond Correlation Really Matter? (PIMCO, 2018)

Presumably, many investors think that the stock-bond correlation (historically negative) speaks to the extent that bonds can be used to hedge a GFC-style equity market sell-off. But the stock-bond correlation says little about the relative performance of these asset classes, which may matter more to investors.

Stocks, Bonds and Causality (PIMCO, Mar 2018)

The authors of this paper tackle the relationship between stocks and bonds along several fronts, examining the historical record and relating this to an econometric model of causality.

Shaping bond allocations to hedge equity risk: think carry, not just correlation (Wellington, 2017)

During risk-off periods, money flows into safer assets such as government bonds and highly rated corporate issuers. But with bond yields as low as they are, is there room remaining to offset potential equity losses?

The Road Back to the 70s: Implications for Investors (Amundi AM, Jun 2019)

For compliance reasons, this paper is NOT accessible in the United States

Amundi provides investors with portfolio construction and asset allocation guidelines that vary according to different inflationary regimes. The particular inflationary environment alters return expectations and correlations for a variety of asset classes.

A Century of Stock-Bond Correlations (RBA, 2014)

The Reserve Bank of Australia presents data on the 20th century correlation between U.S. stocks and government bond yields.

Stock Earnings and Bond Yields in the U.S. 1871 - 2016: The Story of a Changing Relationship (2018)

This paper examines the long-run relationship between U.S. equity earnings and bond yields, with data going back nearly 150 years. They define two extenuated periods of equilibrium during this time period, the most recent of which emerged following a paradigm shift in the evaluation of stocks in the 1950s.

Stocks/Bonds: The Fire and Ice Debate (Man Group, March 2017)

For most of recorded history, the long-term correlation between equities and bonds has consistently been a positive one. But for the last 20 years, the past relationship appears to have disappeared. Man Group explores the reasons behind this.

Diversification: High Dispersion Beats Low Correlation (Enterprising Investor blog, 2019)

Advisers and asset managers should look at the dispersion of returns in addition to looking at correlation, when discussion diversification within portfolios.

When Diversification Fails (CFA Institute, 2018)

Correlations seem to break down during extreme events, meaning that the benefits of diversification sometimes disappear right when investors need them the most. This paper examines extreme correlations between a variety of asset classes and introduces a corrective technique for multi-asset investors.

Exit door scenarios: How to guard against rising correlations (Fidelity Intl, Nov 2017)

For compliance reasons, this paper is only accessible in certain geographies

Paradoxically, in a downturn, previously uncorrelated assets can exhibit high correlations. Investors can respond in several ways - by adapting the process of portfolio construction, using futures positions, or by allocating to strategies like alternative assets or pair trading.