The three-month correlation between US Treasury yields and stock returns recently reached its highest level since 1997, with the 120-day measure surpassing 50%, a level not seen since the years preceding the dot-com bubble burst in the late 1990s, according to market data. Rising inflation is breaking the traditional negative correlation between stocks and bonds, potentially pressuring both bond prices and equity valuations simultaneously.
Citigroup research notes that high nominal yields alone do not suppress S&P 500 performance; rather, rapid yield increases warrant caution. Weakening employment and inflation data, combined with a dovish policy tone from Federal Reserve Chair Kevin Walsh, have reduced near-term rate-hike risks, while strong corporate earnings provide a cushion for equity markets.
