The Stock-Bond Correlation Finds Its Footing Amid Fiscal Risks

The stock-bond yield correlation is stabilizing after months of jitters, setting the stage for renewed Treasury demand as recession risks build. A negative correlation typically points to inflation concerns, while a positive one reflects growth optimism. In recent months, however, this signal broke down amid heavy selling of US assets. The correlation then turned neutral, stripping Treasuries of their usual diversification value.

The US-China trade truce reignited a risk-on move, lifting both equities and bond yields. With inflation still tame globally and US-specific pressures isolated, the stock-bond yield correlation is unlikely to flip negative again. Fiscal risks linger as Washington pivots from trade to budget negotiations, yet the administration’s quick reversal after a bond selloff shows there are political limits to fiscal brinkmanship.

Treasuries may not rally as strongly as in past recessions, but they will remain the safe-haven as signs of labor market stress emerge. Our Global Fixed-Income strategists are neutral for now, but Treasuries are on upgrade watch. US curve steepeners remain a convex way to position for either bull steepening in a recession or bear steepening in a fiscal scare.