Treasuries, Stocks and Shocks

In our view, the relationship between stock and bond returns – whether they are positively or negatively correlated – depends largely on whether a shock starts in the stock market or the bond market.

Recent market events have once again piqued investor interest in the relationship between the returns of equities and government bonds. Between 26 January and 8 February, the S&P 500 fell dramatically, returning -10% over this short window. During this same period, the yield on 10-year government bonds increased from 2.6% to 2.8%. What happened to the reputation of bonds as “safe-haven” assets in times of crisis?

In our view, the recent rise in bond yields resulted largely from upside surprises in the January payroll and hourly earnings numbers, which led to a reassessment of investors’ inflation expectations. This, in turn, pushed bond yields higher. In other words, the shock emanated primarily from the bond market, rather than the equity market. And it turns out this is critical.

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The Author

Jamil Baz

Steve Sapra

Client Solutions & Analytics



1 We estimate total nominal bond returns to have been 13.4%, 2.3% and 18%, respectively, in the 1970, 1974–1975 and 1980 recessions.

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. The correlation of various indexes or securities against one another or against inflation is based upon data over a certain time period. These correlations may vary substantially in the future or over different time periods that can result in greater volatility.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown.

Hypothetical and forecasted performance results have several inherent limitations. Unlike an actual performance record, these results do not do not reflect actual trading, liquidity constraints, fees, and/or other costs. There are numerous other factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated or forecasted results and all of which can adversely affect actual results. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve. 

In the analysis contained herein, PIMCO has outlined hypothetical event scenarios which, in theory, would impact yields and returns as illustrated in this analysis. No representation is being made that these scenarios are likely to occur or that any portfolio is likely to achieve profits, losses, or results similar to those shown. The scenarios presented do not represent all possible outcomes and the analysis does not take into account all aspects of risk. It is not possible to invest directly in an unmanaged index.

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