Positively Negative: Stock-Bond Correlation and Its Implications for Investors

D.E. Shaw & Co.

Research

16 Pages

D. E. Shaw examines how the shift to negative stock-bond correlation reshaped portfolio construction and bond pricing. It argues central bank credibility on inflation is the key driver, and suggests a reversal to positive correlation could materially alter diversification assumptions and term premiums.

Key Takeaways

Negative Correlation Shift: Over the past 20 years, stock-bond correlation turned negative, driving trillions in fixed income wealth creation and reshaping diversification frameworks across institutional portfolios.
Term Premium Compression: Bond term premiums declined to near or below 0%, reflecting increased demand for hedging assets as investors recognized bonds’ equity offset properties.
Inflation Regime Dependence: If inflation expectations remain anchored near central bank targets around 2%, negative correlation may persist; unanchored inflation could push correlations back positive and raise premiums.
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