Are bonds causing the stock market to fall?

Headlines ask this question in the past 10 business days because on most of these days, stocks fell and Treasury bond yields rose. To be fair, some of these articles also point out that until now, the “Trump rally” has been associated with only a mild upturn in yields from what is definitely a low starting point, historically.

In the Depression (1929-1939) stocks crashed and bond yields also fell a lot, so, for about ten years, the relationship was opposite to the last ten days.

During the 50’s and into the early 1960’s, bond yields were steadily rising (from a low base), but stocks were also rising nicely, albeit with some sharp corrections during recessions. Once again, a decade-plus of the opposite relationship to the one posited by the last few days.

Moving to the horribly inflationary “guns and butter” late 60’s and all through the 1970’s, bond yields rose, but stocks did relatively poorly. This did seem to be roughly the same relationship as our recent days’ trend.

In the early 1980’s (1982) bond yields peaked and have been falling ever since (by over 1,300 basis points or 13 percentage points), viewed on a long time scale which would show the recent 120 bps rise in 10-year Treasury yields since the lowest point in April 2016 as a minor upturn. Once again, the generally falling bond yields have been sometimes associated with decent stock markets, but we had a huge period (2001-early 2009) when stocks did very poorly, but bond yields continued to fall.

In summary, the proposed “inverse relationship” between bond yields and stocks is not borne out empirically by any consistent long-term historical correlation. Even in the past year the correlation has been about zero. So no, it is hard to prove or even assert that rising bond yields are “causing” the decline in stocks. That never stops analysts from jumping on a bandwagon, whether it’s a real one or not.

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