US Stock-Bond Correlation Hits 30-Year High, Reaching Levels Seen Before the Dotcom Bubble Burst

The three-month correlation between US Treasury returns and stock returns has risen to its highest level since 1997. The correlation measured over 120 days has even surpassed 50%, a level last seen in the few years preceding the burst of the Dotcom Bubble in the late 1990s. This reflects how rising inflation has once again broken the traditional negative correlation between stocks and bonds.

Analysts believe that if inflation remains persistently high and drives the market to re-bet on Federal Reserve rate hikes, it will simultaneously depress bond prices and stock valuations, posing a risk to "60/40" investment portfolios.

However, Citi Research points out that historical data shows that high nominal yields themselves do not suppress the performance of the S&P 500 Index; what is truly worth watching out for is a rapid rise in yields.

As employment and inflation data weaken, and with Federal Reserve Chair Kevin Warsh maintaining a dovish policy tone, the risk of a sharp rise in interest rates has diminished. Strong corporate earnings are also providing a buffer for the stock market.