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