peekysnipes

10 yr note and S&P - negative correlation

TVC:US10   US Government Bonds 10 YR
As you can see the trends of the 10 year note and the s&p 500 have a negative correlation

You can look at the 10 yr note when wondering why the overall equities market is making a move in a certain direction When the market is down the bond market often goes up and vice versa.

* N.B. I am refering to the 10 year bond, not the yield. The yield of the bond does the opposite. It goes up when the bond itself goes down. It is important to understand that the negative correlation exists between the s&p and the 10 yr bond PRICE, not the yield. The yield goes down when the prices goes up (more people want the bond so the price goes up and the yield goes down.)

Although many factors are in play, one explanation can be logically associated with the rotation into equities when the macro conditions favour stocks over bonds. and rotation back into bond when conditions suggest lower returns in the equities market. Inflation can affect bonds because it eats their "true yield"( True yield is the yield from the bond minus inflation ), making them less attractive assets in periods of inflation and strong economic growth.

Another thing to note, when the difference between the 5yr and 30 yr gets smaller ( yield on 5 yr goes up while the 30 yr yield goes down ), is suggests higher inflation expectation in the short term but lower inflation expectation in the long term. Historically, when the divergence reduces between the 2 and actually crosses, a significant pull back has happened in stocks.

Let me know what you think of this. Opinion always appreciated.