And stare at the night
Is your head full of noises?
Well, for me it's just like the 4th of July
--Roger Daltrey
A comment on yesterday's post suggested that the stocks and Treasuries showed low or negative correlations over the past 30 years. These data seem to be misleading to some degree.
Below are plots of the 30 yr Treasury bond and the SPX for the past three decades.
Since 2000, Treasuries have trended up, while the SPX has been up and down. Crossing a positive trending series with an up/down series may produce a negative statistical correlation. Note, however, that this does not translate into a symmetrical bonds up/stocks down effect to a significant degree. Since 2000 bonds are up about 50%, while stocks are down less than 5%.
In the 1980s and 1990s, there can be little doubt that both bonds and stocks moved higher. Bonds roughly doubled while the SPX saw a 15x increase. Here the skew favors stocks, but the correlation between the two series is certainly a positive one.
Correlations may differ depending on the time horizon of the data (days, weeks, months, years). My sense is that perhaps daily correlations between stock and Treasuries are lower than monthly correlations.
Summing up, I am not precisely sure why statistical correlations indicate a negative relationship between stocks and Treasuries during this period. Although the past decade has muddled the relationship somewhat, the overall trend in both of these series over the past 30 years has been up.
position in SPX
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2 comments:
Annual S&P 500/10 yr T-note Total Return Correlations
1980-2011 -0.03
1980-2007 0.08
1982-2007 0.05
1982-1999 0.21
1991-1999 0.72
In many years that stocks zigged down, t's zagged higher and clipped coupons, easing net portfolio drawdowns.
Max returns realized by ignoring bonds, but with high degree of vol.
The tricky question remains - how can t's further cushion equity pullbacks with yields at rock bottoms?
Need to have confidence that equity pullbacks will be modest or find more robust hedge such as short equity exposure.
T's haven't been zagging, they've been steadily marching higher during a 30 yr run of credit induced inflation.
The question is what happens to T's if we get secular deflation? Many believe they will remain well bid.
I'm suggesting T's fall, rates rise during long term deflation. Early in deleveraging process risk runs into bonds but leverage remains (now). Once transition past, secular deleveraging of all risky assets means bonds get sold too.
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