Hi All,
I wonder if there is anyone on this forum who may be able to shed some light on the above?
I have read that these move in the opposite direction. The reason being that they compete with each other for investment capital. As the economy is expanding and stocks are doing well, people move over to stocks. When the economy slows down and growth is stocks is less promising, people move over to bonds for a fixed return.
This makes sense, but what about when interest rates are changed? If interest rates are lowered, typically this is bullish for the stock market and this will also increase the value of the bond market and so they move together. If interest rates are tightened, this is bearish for stocks and will also lower the value of the bond market.
Isn’t this a contradiction to the age old believe that the instruments are negatively correlated?
I hope someone can answer. This caused me a sleepless night worrying about it!
Thank you
I wonder if there is anyone on this forum who may be able to shed some light on the above?
I have read that these move in the opposite direction. The reason being that they compete with each other for investment capital. As the economy is expanding and stocks are doing well, people move over to stocks. When the economy slows down and growth is stocks is less promising, people move over to bonds for a fixed return.
This makes sense, but what about when interest rates are changed? If interest rates are lowered, typically this is bullish for the stock market and this will also increase the value of the bond market and so they move together. If interest rates are tightened, this is bearish for stocks and will also lower the value of the bond market.
Isn’t this a contradiction to the age old believe that the instruments are negatively correlated?
I hope someone can answer. This caused me a sleepless night worrying about it!
Thank you
Correlation Between Stock and Bond Prices
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