Economic landscape shapes new romantic partnership findings

Economic landscape shapes new romantic partnership findings

In a guest article for Hedge Funds, published by The Sortino Group, Karl Rogers, the founder of ACE Capital Investments, discusses a significant shift in the relationship between major equity markets and 10-year government bonds. This change, termed the 'new relationship', is a result of prolonged loose monetary policy and Quantitative Easing (QE), leading to atypical interactions between risk assets and bond yields in the current macroeconomic environment.

Traditionally, equity markets and long-term government bonds often had an inverse relationship. Rising bond yields pressured stocks by increasing discount rates and borrowing costs, while falling yields generally supported stocks through cheaper financing. However, after years of very low interest rates and extensive QE, this historic pattern has changed.

Key aspects of this new relationship include:

• Breaking the 40-year bond yield downtrend: From the 1980s until recently, bond yields trended downward, supporting higher equity valuations. Since around 2021, 10-year Treasury yields have surged—jumping from 1.5% in early 2021 to about 4.3% by mid-2025—indicating the end of the long secular bond bull market and creating more volatility and uncertainty in the bond market.
• Impact of QE and prolonged loose policy: QE expanded central bank balance sheets dramatically, suppressing yields and encouraging investors to take on more risk, including in equities. This distorted the usual risk-return dynamics and contributed to a closer, sometimes positive correlation between stocks and bond yields rather than the traditional inverse relationship.
• Structural changes and fading safe-haven status: U.S. Treasuries, once regarded as the safest refuge during equity volatility, have seen declining foreign ownership and signs of structural weakness, hinting at reduced confidence amid rising yields and fiscal pressures. This contributes to atypical market dynamics where both bonds and stocks might decline simultaneously under tightening financial conditions.
• Divergence of global monetary policies: While the U.S. Federal Reserve is tightening policy and reducing asset purchases post-QE, other central banks (e.g., in Japan and the eurozone) still maintain ultra-loose policies. This divergence affects currency strength and global capital flows, complicating the normal interplay between equities and bonds.

The 'new relationship' poses challenges for traditional asset class investors and managers, as the loss of the highly negative correlation between the bond market and the equity market—known as the equity correction protection—is a significant concern. Rising yields now pose direct challenges to equity valuations, while safe-haven demand for bonds is being tested by structural fiscal issues and shifting investor confidence, creating a more complex and less predictable market environment.

It is essential to note that any information in the article should be considered without taking into account the particular investment objectives, financial situation, or needs of the reader. ACE Capital Investments offers investment programs with substantial risk, and no assurance can be given that the investment objectives will be achieved. The article is a guest article for Hedge Funds published by The Sortino Group, and the views expressed are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group.

Karl Rogers' published paper on the 'new relationship' is available upon direct request. Readers are advised to seek independent financial and legal advice before acting on any information. The research, published in 2016, found that the relationship between the S&P 500 and the US 10-year Bond changed from a high negative correlation to a low negative correlation. The article discusses the potential impact of the 'new relationship' and current macroeconomic climate on multi-asset class performance during the past 10 years, specifically during the equity market bull-run.

[1] Source: Federal Reserve Economic Data (FRED) [2] Source: The Bank for International Settlements (BIS) [4] Source: International Monetary Fund (IMF)

Investors and asset managers may find the recent shift in the relationship between stock markets and long-term government bonds, coined as the 'new relationship', challenging. This change has led to a decline in the historically negative correlation between the bond market and the equity market, known as the equity correction protection, which now presents direct challenges to equity valuations.

The 'new relationship' is marked by the end of the long secular bond bull market, increased volatility in the bond market, distorted risk-return dynamics due to prolonged loose monetary policy and QE, and a closer correlation between stocks and bond yields rather than the traditional inverse relationship.

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