COTW: Impact of Higher Real Rates on Stock/Bond Correlations & Risk

October 15, 2018

The chart below can be downloaded here

 

While it is not a perfect relationship, as real (inflation-adjusted) rates on long-term bonds rise, the correlation between stocks & 10-yr rates has tended to weaken (or go negative). These shifts in the relationship between stocks and bonds suggests higher rates are starting to negatively impact all financial assets, which can signal the start of major risk-off episodes.

 

History suggests the level of real long-term interest rates that could trigger a risk-off episode is around 2% (we are currently at ~1%). However, it is worth noting that as the economy has become more indebted over time, spikes in real interest rates/correlations are impacting markets quicker.

 

 

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SpringTide Partners, LLC is a Registered Investment Advisor with the state of Illinois and other states jurisdictions where required. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. All investing carries risk including risk of principal loss. All statements made on this website are opinions of SpringTide Partners, LLC and are subject to change. SpringTide Partners, LLC assumes no responsibility towards the accuracy of the data included. Statements made on website shall not constitute investment advice.

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