Typically, the prices of stocks and bonds tend to move in opposite directions—as stocks rise, bonds fall and vice versa. Increasingly, however, the prices of these two asset classes have begun to move more in tandem—they both rise or both fall together. In fact, according to the Wall Street Journal, the S&P 500 stock market index and 10-year Treasury notes are now the most highly correlated with each other in a decade. (For related reading, see: Why Stocks Outperform Bonds.)

Why Stocks and Bonds Are Growing More Correlated

Analysts at UBS (UBS) reported this week that their analysis shows that prices for the S&P 500 index and 10-year Treasury notes issued by the U.S. government are tracking each other with a +0.41 correlation, the highest in 10 years. Not only is this a near-term record high, but only last month, prices were strongly negatively correlated at -0.70, so it is a very strong reversal as well.

Correlation measures the relationship in the movement of one asset versus another. If they move exactly together, the correlation approaches +1.0, and if they move exactly opposite each other it approaches -1.0. Higher correlations tend to negate the diversification effects of having stocks and bonds in a portfolio, as negatively correlated asset classes can serve as a hedge if one goes down, the other will go up in value. Rising correlations may even force some multi-asset portfolio managers to begin paring back some of their positions to reduce risk exposure.

http://s.wsj.net/public/resources/images/BN-QE710_asdf_G_20161010171026.jpg

Source: WSJ & UBS

The recent spike in correlation may be that loose monetary policy from central banks around the globe are incentivizing investors and portfolio managers to buy assets using cheap, borrowed money. At the same time, central banks are actively buying bonds in the open market, and to a lesser degree stocks in some cases. (For more, see: What Are Central Banks?)

The Bottom Line

Correlation between stock and bond prices in the U.S. have reached a 10-year high, reversing a broader trend of negative correlation. This means that stocks and bonds are rising and falling together, instead of in opposite directions. This may be due to continued loose monetary policy and very low interest rates around the globe. The correlation effect can increase risk for multi-asset portfolio managers who will no longer be able to rely on one asset class moving in value against another as a hedge.

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