Correlation Between Global Equity and Bond Markets: Between Volatility and a Return to Negative Territory
In recent years, the correlation between global equity and global bond markets has shown considerable variability. After a period of very low or even negative correlation in the first half of 2023, a marked increase in correlation was observed in the second half of the same year.
In recent months, correlation has remained somewhat volatile; however, the latest indications suggest a decline in the positive correlation, with values fluctuating around zero. This phenomenon is historically associated with environments where inflation is approaching central banks’ targets (around 2%) and economic growth is moderating. Under such conditions, the two asset classes tend to move in opposite directions: when equities decline due to concerns about growth and earnings, bonds often rise as investors seek safety and interest rates fall, and vice versa.
A return to negative correlation between stocks and bonds enhances the diversification potential of multi-asset portfolios and improves the risk/return profile for investors. In particular, the higher yields on global bonds today offer greater protection during periods of equity market weakness, while elevated U.S. equity valuations suggest lower long-term return prospects for that asset class.
