Long-term US data show more periods in which the correlation between bonds and equities was positive, drawing attention to interest rate trends during periods of rising inflation. Japan is also entering a period of high inflation, prompting discussion of bonds’ stable return characteristics and their new role.
Bonds and equities were traditionally negatively correlated, but in recent years they have increasingly moved in the same direction. This is likely a period in which investment experience developed under deflation is no longer applicable.
An analysis covering 120 years in the US found that the correlation coefficient between the two asset classes was positive for a long period, much of which coincided with periods when CPI was above 2.5% year on year. The reason lies in differences in the objectives of monetary policy. During periods of low inflation, economic growth is prioritized and easing pushes bond prices higher. During periods of high inflation, however, both assets tend to fall as monetary policy tightens.
Japan, like the US, has entered a period of high inflation, making it difficult to regard bonds as the safe-haven asset they once were. Risk premiums are expected to be demanded, putting upward pressure on long-term interest rates. While high-dividend stocks, gold and alternative investments are being considered as alternatives, bonds are viewed as having stable income returns as their greatest strength.
There are also moves to take advantage of the already emerging “world with sufficient interest rates,” and bonds are expected to assume a new role as base assets underpinning portfolios.
A six-part series is planned to explore how to read interest rates under inflation and the new appeal of bonds.