Bond Market Becomes the Biggest Threat to Stock Market Again

The most crucial relationship in the market is undergoing a fundamental shift.

For a long time, the upward movement of U.S. Treasury yields has often been interpreted as a reflection of optimistic economic growth sentiment, with the stock market tending to move in the same direction as yields.

However, this logic is quietly crumbling— as U.S. Treasury yields sprint towards post-crisis high points, the stock market's reaction to yields is increasingly resembling the pattern of past inflationary times: higher yields are no longer good news, but trouble.

Key data: The extent of the relationship reversal is alarming

The 30-year U.S. Treasury yield closed at 5.14% on Monday, marking the highest closing level since July 2007. At the same time, the correlation between stocks and bond yields has turned negative, and the degree is far beyond the levels seen in recent years.

The rolling 30-day correlation coefficient between the S&P 500 and the 10-year U.S. Treasury yield has dropped to -0.6768, not only negative but also the lowest level since September 1999. This highly aligns with Goldman Sachs' research: "The stock/bond yield correlation has reached its most negative level since the 1990s (calculated by a 2-month correlation)".

The core factor driving this shift is inflation. The data shows that the rise in inflation expectations is the main variable driving the stock-bond correlation into negative territory, with the correlation between the S&P 500 and 10-year real rates as well as short-end inflation both turning significantly negative.

Historical pattern: Rapid yield spikes, stock market under pressure

Historical data shows that whenever bond yields experience a sharp jump, stock returns often turn negative in turn, with a rather stable synchronicity between the two.

Combined with previous judgments from Citigroup strategists—that the next key level for the 30-year U.S. Treasury yield might be 5.5%, and 62% of respondents in Bank of America's Global Fund Manager Survey anticipate that yields will break through 6%— the current stock market situation is becoming delicate, with positions at historical highs while bond market pressures continue to build.

This "gear shift" in the stock-bond relationship may have only just begun.