Apr

24

There have been many green days (bonds and stocks both up). About the highest since Nov 2009 and March.

# of green days

    2009  2010    2011

Jan  2       3        3

Feb  3      5         6

Mar  6      8        0

Apr  5      5         6 to date

May  5     2

June  5    2

July  5     5

Aug  6     2

Sep  3     4

Oct  4     6

Nov  10   5

Dec  2     7

What do you think it portends, and less interestingly, how come there are so many positive comovements?

Steve Ellison comments:

In the mid-1990s, stocks and US Treasury bonds moved in the same direction on over 65% of all days. In the last four years, stocks and bonds have moved in the same direction on less than 40% of all days. Even after the recent green days, stocks and bonds have moved in the same direction on only 27 of the 77 trading days (35%) in 2011.

               Comovement
Year         Percentage
1993         0.647
1994         0.739
1995         0.663
1996         0.706
1997         0.652
1998         0.418
1999         0.560
2000         0.482
2001         0.512
2002         0.348
2003         0.400
2004         0.536
2005         0.532
2006         0.512
2007         0.410
2008         0.351
2009         0.413
2010         0.368

The hypothetical value of a stock is the net present value of all future income, discounted by the risk-free interest rate. All other things being equal, then, an increase in bond prices should be bullish for stock prices. However, this relationship might break down for several reasons, including:

- Bond prices might rise (fall) in response to deteriorating (improving) economic fundamentals that reduce (increase) expected future corporate income
- Asset allocation changes between stocks and bonds might drive price movements more than fundamentals
- Variations in very low interest rates might have little or no effect on the net present value of future income (because models might assume more normal rates in the future)

Regarding the last point, there appears to be a correlation between the level of interest rates and the degree of comovement of stocks and bonds:

10-year bond yield
greater     less than               Comovement
than        or equal to     N       Percentage
2%           3%            203          0.374
3%           4%            822          0.370
4%           5%           1353         0.466
5%           6%           1124         0.560
6%           7%            862          0.643
7%           8%            246          0.687
8%           9%               4           0.750


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