For decades, the pitch was simple: hold 60% stocks for growth and 40% bonds for safety. When equities zigged, Treasuries zagged. That relationship, the bedrock of conservative portfolio theory, is cracking under the weight of persistent inflation and ballooning fiscal concerns.
The April Consumer Price Index came in hotter than expected, with prices climbing 0.6% month-over-month and 3.8% year-over-year. The result has been a punishing selloff in US Treasuries, pushing the 10-year yield to 4.59% and sending the 30-year past the psychologically significant 5% mark.
The correlation problem
The 60-day correlation between S&P 500 returns and Treasury returns has reached its highest level in more than 20 years. Stocks and bonds are increasingly moving together, which strips Treasuries of their traditional role as a hedge during equity turbulence.
Jonathan Cohn at Nomura put it bluntly.
