Whitepaper

Bond equity correlations: are the times a-changin’?

Questioning the persistence of the negative correlation between equity and investment grade fixed income price returns has become relevant and timely because of the intersection of a few topics. First, co-movement of the equity and sovereign bond markets during the March 2020 market sell-off (despite this having occurred for various idiosyncratic reasons) reignited the debate and concern about the hedging potential offered by fixed income assets. This led to (a)an (re)investigation of the – perhaps taken for granted – sovereign bond-equity correlation relationship, a relationship that has been negative over the past two decades. And, since many argue that much of this negative correlation can be attributed to the lowering and persistently low levels of inflation over this same period, the recently (re)ignited debate about the outlook for inflation has brought this bondequity relationship discussion back to the forefront of popular macroeconomic debate.

We investigate the importance (or not) of correlation risk.