Equity and bond prices have had a particularly strong positive relationship since 1980. Which is normal – quiet, uneventful macroeconomic growth sees equity and bond gambol, hand in hand on a flame of desire, upwards.

Since June 2003, though, the two have been falling out and equity has gamboled alone ever higher. Where is the love?

Such splits are not unknown. Spats (negative correlation) typically occur when uncertainty and doubt creep corrosively between the lovebirds. What are more unusual are long term separations.

Exhibit one: SPX and US 10-year bond yield (inverted), 1995-2000 (click for larger image)

The period 1996 to end 2000 was especially difficult for the couple. The movement of one explained less than 40% of the movement of the other. In the preceding 15 years they’d hung out together over 75% of the time. In particular, they grew apart from late 1998 as Mr Equity’s substance abuse problem (liquidity) began in earnest following a series of confidence-sapping encounters involving Asian currencies, Russian debt and the cleverest hedge fund ever.

Exhibit 2: Global liquidity (Foreign Official Assets Held at Federal Reserve Banks) and the SPX, 1971 to date (click for larger image)

Abruptly, from 2000, it became more difficult for Equity to get high. By the end of the year liquidity dealers were even raiding users and Equity got the withdrawal shakes. But Ms Bond seemed to be making a new life for herself and by 2003 was a world away from the sad withered creature she had been in 1999.

Exhibit 3: SPX and US 10-year bond yield (inverted), 1995-2000 (click for larger image)

In a desperate gamble to get her back - and himself in a Good Place - Equity went back hitting the liquidity with a vengeance in 2002. For a time it was like old times for the couple. Sweet. Yet quickly Bond found it harder and harder to keep up with Equity. And when, by 2006, he had taken to giving her odd looks whilst humming wistfully “Don’t cha wish your girlfriend was a freak like me?” (stay on topic, right click) she knew something had to give.

As did observers who knew, thankfully, Equity had begun easing off the liquidity. They just hoped the process wound down gently so everyone could get back to normal. HIOBs.

Sources: Yahoo Finance; Statistical Supplement to the Federal Reserve Bulletin; Federal Reserve Archival System; Federal Reserve Economic Data (FRED); Market uncertainties and stock-bond correlation, Dr F Bulthaupt, Q1 2004, Dresdner Bank

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  1. vfsv // 10/11/2006 08:16:00 PM

    Interesting & well written.

    We see some corollary with Silicon Valley jobs & RE. They're supposed to move together but lately RE is gettting high but job stats are merely blowing smoke.

    See the latest snapshot at:

    To keep up with "What's really happening," visit:


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