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MBS Day Ahead: Earnings Season Helps Explain Stocks vs Bonds Correlation Breakdown

Posted To: MBS Commentary

One of the market themes that has been most noticeable and most reliable post-covid is that of the "stock lever"–our in-house term for the phenomenon whereby stock prices act as a lever for bond prices. If we're following bonds in the form of yields (instead of prices), the stock lever results in 10yr yields and stock prices following each other in lock-step at times. Here's an example: But as I frequently like to point out, the correlation breaks down over longer time frames for a variety of logical reasons–not the least of which being that stocks are tied to company valuations that can grow indefinitely while bond yields are interest rates that would ideally hold a sideways range over time. Now we're starting to see the correlation break down over shorter time horizons…(read more)

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