what is the correlation between bonds and equities?

Answer 1

Bonds drive the equity prices.
When bonds are upgraded by Moody's' for example,the result of the corporate bond being upgraded can have a strong effect on the stock price. The reverse is also true.

Answer 2

It always amazes me when people make statements like the ones here without knowing the facts.

Bond returns and equity returns are, in fact, positively correlated. The Lehman Brother's Corporate Bond Index has a beta of between 0.15 and 0.2. I've actually done the calculations, so know it to be true.

It looks like Tom made an attempt to find the correlations. There are two problems with his analysis. He claims to have used ten year prices from Yahoo!. The problem with that is that Yahoo doesn't store the prices of bonds, it stores the yields. Yields and prices move in opposite directions -- so his negative correlation translates to a positive correlation for prices. It also looks like he used values in the correlation, but the correct way to do it is to use the changes in values.

The reason for the positive correlation is quite simple. If the stock market goes up, equity prices go up -- and companies are worth more. This means that they become safer. When companies become safer, their debt becomes more valuable.

Here is another reason. When interest rates fall, bonds become more valuable. But lower interest rates also lowers the cost of funds for corporations, allowing them turn formerly unprofitable projects into profitable ones. This raises the value of the companies and raises the value of their equity.

Answer 3

While Errai's answer may be good in theory, you may want to learn how to do this yourself. It's very easy and the exact answer is -0.77. This is based on the past 30 years prices on a monthly basis vs. the S&P 500. You simply would have to download the historical data of each into excel, and use the excel formula =correl(array1,array2), with array one being the bond prices and array 2 being the stock prices. This data is all available on Yahoo Finance, and the 10 Year Treasury is the most appropriate bond data to use at this point. Most people don't have access to historical returns of the Lehman Aggregate Index, but that would be better if you did. Thank you.

Answer 4

Bond prices and Stock prices are usually have a very strong negative correlation. Go to yahoo Finance and when you see the price of Bonds and S&P 500, there are usually opposites. There are several reasons for this, which are

1. When interest rates rise, bonds become cheaper and stocks riskier, therefore people buy bonds, sell stocks. Opposite could happen.

2. When there is a recession or belief of a recession, people would buy bonds, sell stocks, opposite is also true.

Here is the chart of S&P 500 VS Bonds
http://finance.yahoo.com/q/bc?s=%5ETNX&t=1y

Answer 5

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Answer 6

The returns on bonds are constant. The return on equities depend on the beta. (Return = beta x Equities + risk-free bonds) At least, according to the theory of investments...

Not sure that this is what you meant, though..