Why have stocks and bonds moved in the same direction recently?

Question

The commentary I've read says that stocks have a bad day when investors are afraid that interest rates will go up. But rising interest rates make bonds go down too! Is the historical advice--stocks and bonds move in opposite directions--no longer valid? Or is this just a temporary anomaly?

Answer 1

Bond returns and stock returns can move together or in other directions. The reasons are different.

For example, if there is a shift in demand, it could be good for one asset and bad for the other. In late 1987, there was a "flight to quality" where people sold off their equity positions and bought bonds. This caused stock prices to fall and bond prices to rise. There have been other times where demand for bonds fell and demand for stocks rose -- causing the opposite effect.

But suppose that there is no shift in demand between the two asset classes. Then if yields increase, the present values of a bond's future cash flows will decrease causing people to lose money in the bond market. But if rates go up, then the expected return of stocks also rises. If there is no corresponding increase in the expected cash flows of stocks, their value would also have to fall.

Over the long run, returns on bonds tend to be positively correlated. The beta on investment grade corporate bonds, for example, is usually between 0.10 and 0.35.

Here is another reason why corporate bonds should be positively related to stock price. Suppose a company is debt. If the company's stock goes up -- then the company is worth more. If it is worth more, the debt becomes safer. If the debt becomes safer, it increases in value.

Answer 2

Bond prices and stock prices can move together or in other directions. The reasons are different.

1. money shifting from bonds to stocks or from stocks to bonds, it completly depends on the sentiments of investors i.e confidence on stock market and returns on invesment on bonds.

Bond prices and interest rates are always inverse proportional, if the interest rate increases the bond value come down to keep the same percentage of return. if the interest rate decreases the bond value increases.

The reason for recent moment is completely different.

Bond prices are completly depend on the domestic interest rates but stock market depend on the global issues (like recent increase in interest rate in US, other emerging markets like Brazil etc. captures attention of investors)

Answer 3

Is that where you get your knowledge -- media commentators? You actually believe this stuff, and make decisions from it? Dude, it's just entertainment.

The markets are a living, breathing thing; they go where they want. They don't need a "reason." Sometimes there is no reason, but you can be sure the media will give you one.

Go to the library. Read a book. Come to your own conclusions. Investigate it, test it, map it out and study it again. You've got a computer, so chart it. Check it out for yourself; don't listen to opinions, tips and goofball media bubbleheads.

Answer 4

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Answer 5

As interest rates go up, the yield on bonds goes up, making them more attractive. Not to mention that many companies carry fairly heavy debt loads, and when interest rates go up, it hurts them.

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Answer 6

I just read your "resolved" Matrix question and felt compelled to respond:
Silly, we ARE living in the Matrix-blue pill, red pill-all the same- still the Matrix.