Stocks Aganst Bonds

Here’s an interesting chart. This shows how the S&P 500 ETF (SPY) has done compared with the Long-Term Treasury ETF (TLT). Since April, they’ve become almost mirror images of each other.

I ran the numbers and found that since April 21, the daily correlation between the two is -0.55. In other words, when stocks go up, long-term bonds go down. When bonds go down, long-term stocks go up. Now let’s place “generally” before those last two statements, but you get the idea.
What does it mean for the market? It’s hard to say. It usually means that capital is undecided. Money has a simple rule: It goes where it’s treated best. Right now, equity and debt are slugging it out.
The 10-year bond has been taking a hit recently but that’s hardly a shocker considering how low the yield went. On August 25, the intra-day yield dropped to just 2.42%. Think about that for a moment. At that rate, even after 10-years, you still won’t have made 25% on your dough. The yield has crept up and it just jumped above 2.8% today.
I’m happy to see the market go up, but we need to bear in mind that it’s only coming at the bond market’s expense. Personally, I can live with that. But if I had my preference, I’d like to see new money come in from commodities that would fuel both asset classes.

Posted by Eddy Elfenbein on September 10th, 2010 at 10:10 am

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