Stock Correlation with the 10 Year Yield

I’m not sure how much you follow intermarket correlations, but there’s one relationship I’d like to highlight to you.

The S&P 500 Index has been extremely correlated with the 10 Year Treasury Note Yield ($TNX), and continues to be so today.

Generally (as demonstrated over the last 100 years, but not over the last 10 years), rising yields are bad for the stock market and falling yields are good for the stock market, but yields and the S&P market have traded near lock-step since just before 2008 began.

Recall that bond yields are inverse to bond prices, so there are implications here for the bond market as well. Bonds and stocks often compete for investor funds, and assets flow back and forth between these markets.

Notice that on the recent rally (from Mid-March), Yields have risen with the market, meaning bond prices have fallen, adding to the correlation (money has flown out of bonds and into stocks, driving yields down).

To show you how recently the correlation began, let’s view a weekly chart:

Let’s pull it back to 2000 on a monthly chart:

Notice how the 10 Year Yields follow the stock market decline from 2000 into 2003 swing for swing.

Also, notice that 10 Year Yields hit the same level they did near the 2003 stock market bottom.

As yields fell along with stock prices, investors shifted more and more into bonds (causing bond prices – not shown on these charts – to go higher).

It’s a fascinating correlation, and one to which you might want to pay attention.

(Rates closed today at 3.72% – that’s what the $37.20 on the left side of the chart means)