Sep

11

What is the explanation (either your own or the "conventional wisdom") for why bonds have been rallying concurrent with a strong stock market and all the talk about recovery?

Bloomberg news reports:

The $12 billion of [long term govt bonds] offered yesterday drew the strongest demand in more than two years. The U.S. Treasury auctioned [a total of] $70 billion of notes and bonds in three sales this week to help finance a record budget deficit. “It was a stellar auction at much lower rates,” said Thomas Tucci, head of U.S. government bond trading at RBC.

Paolo Pezzutti adds:

It seems that all assets are going in the same direction (commodities, bonds, stocks). Is there anything negatively correlated that one could consider to diversify?

Alston Mabry has a one word answer:

USD

Phil McDonnell also replied:

Same day correlations for various assets with respect to stocks (SPY) for the last 105 days:

FXY yen -44%
TLT 20yr -32%

So there are still some things that are negatively correlated with stocks. Same day correlations are not useful for Granger-style prediction [of one time series from another], but they are useful for reducing the risk of a portfolio constructed using the various assets.

It should also be noted that just because price levels have gone up over a certain period of time [i.e. an upward drift in both series] does not mean that the price changes are positively correlated. The preceding correlations were calculated based on daily net changes in order to avoid the spurious correlation problem caused by using price levels.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Vincent Andres answers:

Why have bonds been rallying? In the past, government(s) were putting their hands in the machine only under exceptional/rare occasions. Now they are doing that on a regular basis. Markets (as we used to know them) have never been so oligopolistic and manipulated. The fact that old rules like stocks up/bonds down (and many others) now no longer works is simply one of the signature of all those oligopolistic interventions.

A possible scenario : The stock rally being a completely constructed one, concerning in fact only a restricted number of actors. Those actors aside, the stock markets were not rallying, that is what bond buyers believe and why they buy bonds.

For our stock "markets" (and some others), just a facade subsists.


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2 Comments so far

  1. Sumit Agrawal on September 11, 2009 3:33 pm

    There could be two reasons:

    - (1) Perhaps the investors are cautious at these levels and are constructing portfolios with equity (which they want to have exposure to ) + US Ts (which are perhaps used as a hedging instrument). If this is true, we have reached a point where the most speculative and safest instruments are being bought together. Gold + Equity ;

    - (2) Maybe there is too much capital chasing financial assets, but then this is not my favorite

    - (3) The fall in USD, for last month, has surprisingly coincided with rise in value of US Ts over last two-three weeks. This is also surprising, not only because it is a correlation aberration but also because of associations of US borrowing either weakening both or strengthening both . Perhaps the reason is (1) or similar to (1) or maybe Chinese in their attempt to provide a floor to dollar are snapping up US Ts. Something is afoot and that is why i am long USD

    ~ This is all conjecture of my ever explanation-seeking tiresome mind

  2. david higgs on September 11, 2009 5:17 pm

    perhaps it has to do with Bud's query and QE… Katy-bar-the-door when this animal decides to go Lobagola and heads back to the other side of the river…

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