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The Correlation Between Stocks And Bonds Is Creeping Back

From Eric Bush: On 11/4/16, the 65-day correlation between between the S&P 500 and US 10-year treasury yields was as negative as it had been at anytime since June 2007.

The 65-day rolling correlation was -30% compared to a 73% correlation that had occurred just a few months earlier in June. The negative relationship seems to be short lived as the 65-day correlation is once again moving positive as it is currently 24% and the 22-day correlation is now at 50%. The 120-day correlation remains at 0% but will begin trending higher as indicated by the shorter-term correlations.

It is worth remembering that the longer term correlation between stocks and bonds flipped after the Asia crisis in the late 1990s. Stocks and bonds were negatively correlated from 1966 to 1998 and since then have been positively correlated as deflation has become a more prominent fear than inflation generally speaking. The four year correlation stands at 30% today and while it is well off the highs of the last several years, the last chart indicates that it is still at an unusually high level since 1875.

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The iShares Barclays 20+ Yr Treas.Bond ETF (NASDAQ:TLT) closed at $119.94 on Friday, down $0.24 (-0.20%). Year-to-date, the largest ETF tied to long-term Treasuries has gained 0.68%, versus a 1.44% rise in the benchmark S&P 500 index during the same period.

TLT currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #21 of 27 ETFs in the Government Bonds ETFs category.

This article is brought to you courtesy of Gavekal Capital.

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