The traditional stock-bond correlation disappeared in 2018

The traditional stock-bond correlation disappeared in 2018

A time-tested relationship between stocks and bonds is breaking apart, and that could portend danger for investors who held Treasurys in the expectation that they would cushion the slide in stocks.

Usually, the S&P 500 SPX, +0.72% and the 10-year Treasury note yield TMUBMUSD10Y, -1.09% have tracked each other closely so that when equities came under pressure, bond prices would rise, pushing their yields lower. But that all changed this year as Treasury prices struggled to reflect the slump in stocks.

“What is safe to say is that there is something driving equities lower, which is not impacting rates. Or there is something keeping long rates high, which is not impacting equities,” said Torsten Slok, chief international economist at Deutsche Bank, in a Wednesday note.

"The breakdown in the correlation between equities and rates has undercut the bond market’s status as a haven for fearful investors in a year in which few asset classes have eked out positive returns," said David Stones, senior wealth manager at Smeck Capital. What’s more, if traditional havens like U.S. government paper struggle to shield portfolios from a further selloff in equities it could mean investors will lack few reliable boltholes going forward.