Equity-Bonds Equilibrium and Inflation Uncertainties
Marc Chagall - Cirque Bleu (1950-1952) Bonds-Equity correlation is positive again! The correlation between Bonds and Equity returns is moving fast these days: in a few weeks it has moved from -70% in February to +12% this week. Equity-bonds Correlation - Source: Google Finance Is this move into positive territory abnormal? What are the factors driving this change of sign? Does it mean that investors should change their Bonds-Equity allocation? Is that a warning signal for the fixed-income products? Back to the pre-2000 regime? A positive correlation between the returns of bonds prices and equity prices means a negative correlation between bonds yields and equity returns; this inverse relationship between equity prices variations and yields had been actually prevailing before 2000. As explained by Ranking & Shah Idil, in their paper “ A Century of Stocks-Bonds Correlations ”, Royal Bank of Australia, 2014 : The recent [last 14 years] period of positive co...