The unseen relationship between bond and equity in the past 10 years

When talking about the biggest winner this year on the capital market, people eye on the gold price and rebound market. However, the astonishing bond market just created a legend for fix income investors. The once concerned US bond market not only got the rally along with the market now turns into the best historical performer on the market. While the best than ever US bond market enriched investors, risks seemed to be more important right now.

One of the bond pricing factor is fluctuating since this year. Discount factor is calculated from the risk free interest rate which now is globally discussed by all of the investors. Fed’s excuses on rate hike and explanations on economy data has placed a thick mask on the changes of interest rates this year. Actually, the battle between dovish and hawkish will be the determination to the rate decision. In the long term, the rate will increase in US which is supposed to put down the bond price. On the contrary, EU still shows strong willingness to hold a negative rate in the long term which will have the opposite effect on bond market when compare with US. But the tricky thing is both bond market went into a strong bullish this year where they both achieved significant gains.

 

The explanation for this phenomenon should be based on investors’ behaviors. Gold is not the only place to secure capital now. Investors are buying stocks while trying to put the money into safe bond market. It’s not like the book said whether greedy or fear dominates the market. Greedy is the left hand and fear is the right hand. They both serve together to investors on managing their portfolios. Here we see the strong buy power in the stock market and also strong buy power in the bond market. Both prices went up and the difference between returns just narrowed down.

 

For the past ten years, it seems it is the first time that the returns of the bond market and equity market follows the same pattern after oil price collapsed in January this year. Since then, the Fed postponed the rate hike decisions in order to help the market which truly happened. Meanwhile, investors are buying on the bond market to seek for a safer investment. However, this close link will be the fatal factor to destroy the whole market since both will also fall simultaneously just like they used to be when in the bullish trend.

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