Bitesize: More on the bond-equity correlation

Matt Roberts-Sklar.

In a previous post I showed that bond and equity returns are negatively correlated, having been positively correlated for most of the 18th-20th centuries. The time series was long (three centuries) and the chart was just for the UK, prompting two very reasonable questions: 1) does your story hold for countries other than the UK? and 2) what’s happened to this correlation recently?

To address these questions, this chart shows an analogous rolling correlation of weekly bond and equity returns for the UK, US, Germany and Japan:

Source: Bloomberg, Bank and author calculations. Lines show one year trailing correlations of weekly returns on 10-year government bonds and equity indices (FTSE All Share for the UK, S&P 500 for the US, DAX for Germany and Topix for Japan). Note: the correlation of equity returns and bond yields would have the opposite sign.

To see what’s been happening recently, I’ve used a one year rolling window to calculate the correlations.

A few points jump out from this chart:

  1. The pattern is very similar across the US, UK and Germany, perhaps unsurprisingly given the strong cross-country co-movement of bond yields and the fact that these equity indices are more global than domestic.
  2. Consistent with Japan’s ‘lost decade’, the correlation went persistently negative in Japan in the early 1990s, around five years earlier than for the other countries.
  3. Whilst the correlation has been, on average, negative for each of these four countries since the early 2000s, there’s quite a bit of variation. And the correlation has been much less negative in the past couple of years.
  4. The correlation for Japan went positive in early 2016 following the introduction of negative rates by the Bank of Japan. Moreover, the newly-introduced long-term yield target should mean Japanese government bonds and equities are uncorrelated going forward.

Matt Roberts-Sklar works in the Bank’s Macro Financial Analysis Division.

If you want to get in touch, please email us at or leave a comment below.

Comments will only appear once approved by a moderator, and are only published where a full name is supplied.

Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.

One thought on “Bitesize: More on the bond-equity correlation

  1. I suggest you look at inflation as the determinant of the regime shift in bond-equity correlation. Studies decades ago had pointed to the fact that below certain levels of inflation, fears of a economy that causes lower yields and higher bond prices depresses equity prices as deflation fears overwhelm earning discount rate considerations.

Comments are closed.