The bond market is in turmoil. Yes, the 40-year bull run on bonds is long gone, but the pain in the bond market is far beyond what many could have imagined. In fact, the bond market has experienced its worst two years in more than a century and a half. This decline in bond values has shattered the classic 60/40 portfolio and put tremendous pressure on leveraged borrowers.
In contrast, the equity market seems to be largely indifferent. Over the past three years, there has been a notable negative correlation between long-duration stocks and bonds, with the two moving in opposite directions. This massive divergence raises the question of how long-duration stocks and bonds will repair their long-term relationship. Will stocks fall to meet bonds or vice versa? Or will they meet in the middle?
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