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00:00 Speaker A
So you argue okay, correlation risk is rising again. The stock bond relationship you point out increasingly driven by by monetary policy. So I’ll I’ll I’ll double barrel this first one. One, just explain this for us. What’s the trend you’re seeing there? And two, I guess drawing the knock-on question is, okay, does that mean Treasuries no longer diversifiers in the same way?
00:20 Speaker B
Right. So, uh, great to be back, by the way, Josh. Thanks for having me again. So, we are, uh, looking very much right now at the, uh, shorter-term correlation between stocks and bonds. Uh, this is a crucial risk consideration for, uh, any portfolio, particularly balanced funds, conventional 60/40, 70/30 mixes. And what we see is that while correlations are time-varying, uh, the shorter-term correlation between stocks and bonds actually bottomed, uh, with the Fed’s last, uh, meeting when they cut rates at the end of October and has been steadily rising since. And at the same time, we’ve seen the long end of the curve respond by rising as well.
01:21 Speaker B
Now, initially, the market’s interpretation of that, a lot of the narrative was around, um, Powell Powell’s somewhat of a surprise during the presser when he said, look, a cut at now tomorrow’s meeting is anything but baked in the cake. Um, but what we’ve seen since is is very reminiscent in terms of the long end’s reaction to what happened during the easing, the mini easing cycle last year. If you remember last year, the Fed cut, uh, twice and, uh, we saw the long end of the curve rise about 100 basis points.
02:04 Speaker B
And, um, that suggests that there are different dynamics at play. Um, likely, we think the dynamic at play is that, uh, the bond market, particularly long-term holders are looking at the possibility of a regime change at the Fed, uh, and the possibility of, you know, a dovish tilt next year, uh, at a time where maybe if you look at what’s being priced in at the shorter end, that’s not necessarily warranted and therefore could, uh, excessively stimulate, could lead to, um, you know, expected inflation rising, um, expectations for growth rising as well.
02:51 Speaker B
And so, if we get into an environment which takes us back to 2022 as the most recent example where you have the long end of the curve rising, uh, and you do have a pickup in equity volatility for any reason. And at a time that stocks and bonds are now increasingly moving together, that’s a very material risk, right? And many investors who believe that they are, um, balanced, uh, or diversified in terms of the bonds providing that balance and that diversification, uh, may be in for a surprise if that correlation persists higher.