At the end of 2021 the three-year correlation between the S&P 500 and 10-year Treasury returns was −0.38: bonds reliably cushioned stock losses. By the end of 2024 it was +0.67. In October 2026 it is +0.38, lower but still positive, with the 10-year yielding 5.31% and core inflation at 2.45%. The shift explains why 2022 was so painful for balanced portfolios, and why the question “will my bonds protect me?” now depends on what kind of shock comes next. For background on what drives yields, see the yield curve explained.
What is the stock-bond correlation?
The stock-bond correlation is a number between −1 and +1 that measures how stock and bond returns move together over a period, usually measured on monthly returns over one to three years.
- Negative (say −0.3): bonds tend to rise when stocks fall. Bonds hedge the portfolio, and a 60/40 mix is much less volatile than stocks alone.
- Near zero: the two move independently. Bonds still reduce volatility, but don’t offset losses.
- Positive (say +0.4): they tend to fall together. Adding bonds still lowers volatility because bonds are less volatile, but they don’t cushion a crash.
It is not a fixed property of the two asset classes. It changes with the economic regime, and that is the point of this article.
Why did the correlation turn positive in 2022?
It turned positive because the shock hitting markets changed from weak growth to high inflation. Inflation hurts both assets at once: it pushes yields up, which lowers bond prices, and it raises the discount rate on company earnings, which lowers stock valuations.
In 2022, core inflation peaked above 6% and the Federal Reserve raised its policy rate by 4.25 percentage points. The 10-year yield rose from 1.52% to 3.88%. The S&P 500 fell 19.4% on price, the 10-year Treasury lost an estimated 16.4%, and a 60/40 mix about 18%. A portfolio meant to be “balanced” took nearly the full equity loss. We look at what that means for portfolio design in why portfolio diversification fails. The same forces pushed the 10-year to 5.31% in October 2026; rising bond yields and stocks breaks down that move.
Why does inflation decide the sign?
Inflation decides the sign because it determines whether bad news for stocks is good or bad news for bonds. When inflation is low and stable, the main risk is a slowdown, which lowers expected rates and lifts bonds. When inflation is high or uncertain, the main risk is tighter policy, which hurts both.
The pattern in the data from 1993 to 2026 is clear. In 36-month windows where core inflation averaged below 2%, the stock-bond correlation averaged −0.37. Between 2% and 3% it averaged −0.15, with wide swings. Above 3% it averaged +0.40. Academic and central-bank research reaches the same conclusion with longer data sets: the negative correlation of the 2000s and 2010s coincided with anchored inflation, and higher, more volatile inflation in earlier decades came with a positive one.
Core inflation above about 3%: expect bonds to fall with stocks. Below about 2%: expect bonds to hedge. In between, as in 2026 with core CPI at 2.45%, bonds hedge growth scares but not inflation surprises, so the next shock decides.
Which shocks push stocks and bonds together, and which push them apart?
Growth shocks and panics push them apart; inflation shocks and hawkish policy push them together. The realized correlation over any period is a blend of the shocks that happened in it.
That is why the correlation can flip within a year. The 2020 Covid crash was a growth shock and Treasuries rallied hard. In 2022, rate and inflation shocks dominated. In April 2025 the tariff shock combined both: the 10-year yield fell for two days as stocks dropped 10.5%, then jumped from 4.01% to 4.48% in a week while stocks stayed under pressure. Think of each new risk as a question: will it make the Fed cut or hike? If cut, bonds help. If hike, they don’t.
Has the correlation been positive before?
Yes. A positive stock-bond correlation was normal for most of the 20th century. The negative regime of roughly 2001 to 2021 is the unusual period, not the current one.
Long-run studies of US data show positive correlations through much of the 1970s, 1980s and 1990s, when inflation was the dominant macro risk. In our 1993–2026 data the 36-month correlation was mildly positive through 2000, around +0.2, then negative from 2001 until 2022. Investors who started their careers after 2000 learned a rule that only applies to a low-inflation world.
What role do term premium and yields play?
When investors demand more compensation for holding long bonds, the extra yield is called the term premium. A rising term premium pushes long yields up even when the economy weakens, which keeps the correlation positive.
Large government deficits, heavy Treasury issuance and uncertainty about future inflation all raise the term premium. In October 2026 the 10-year yield of 5.31% sits more than a percentage point above the 3-month T-bill at 4.22%, a steeper curve than for most of 2022–2024. Higher starting yields cut both ways: bonds pay more income and have more room to rally in a recession, but they can still sell off if inflation or deficits surprise.
What should investors do about a positive correlation?
Treat bonds as an income asset and a recession hedge, not as crash insurance, and add explicit protection for the scenarios bonds don’t cover.
| If the correlation is | Bonds do | Add |
|---|---|---|
| Negative (core CPI < 2%) | Income and crash cushion | Little; bonds do most of the work |
| Mixed (2%–3%) | Income; cushion in growth scares only | A modest put or put-spread budget |
| Positive (core CPI > 3%) | Income only; can fall with stocks | Explicit hedges, shorter duration, cash |
For explicit hedges, see tail risk hedging strategies and VIX calls as a tail hedge. For the bond side itself, fixed income portfolio management covers duration choices.
How do you monitor the stock-bond correlation?
- Each month, check year-over-year core CPI. Above 3% is the danger zone for bonds as a hedge.
- Each quarter, recompute the 36-month correlation of your stock fund against a Treasury fund, or follow ours in the weekly note.
- On big down days, check whether Treasury yields fell. If they rose, bonds aren’t hedging that shock.
- Watch Federal Reserve communication: an inflation-focused Fed means a positive correlation is more likely.
- Size equity hedges assuming the correlation is positive, then treat any bond rally as a bonus.
Frequently asked questions
What is the stock-bond correlation?
It is a statistic from minus one to plus one that measures how stock and bond returns move together. A negative number means bonds tend to rise when stocks fall, which makes bonds a hedge. A positive number means they tend to fall together, which makes a stock-and-bond portfolio riskier than it looks.
Why are stocks and bonds falling together?
Because inflation and interest rates, rather than growth, have been the main source of market shocks since 2022. Higher inflation and rates lower bond prices directly and lower stock valuations by raising the discount rate, so both fall at the same time.
Is the stock-bond correlation positive in 2026?
Yes. The 36-month correlation between the S&P 500 and 10-year Treasury returns was +0.38 in October 2026 by Proflex’s calculation from FRED data, down from about +0.67 at the end of 2024 but still positive.
What makes the stock-bond correlation turn negative again?
Historically, low and stable inflation. From 1993 to 2026, when core inflation averaged below 2% over three years, the correlation averaged about minus 0.37. A recession or growth scare can also push it negative temporarily, because bonds rally when investors expect rate cuts.
Were stocks and bonds positively correlated before 2000?
Yes. In the 1970s, 1980s and most of the 1990s, when inflation was higher and more volatile, stocks and bonds usually moved together. The negative correlation of 2001 to 2021 was the exception, not the rule.
Should I still own bonds if the correlation is positive?
Bonds still earn income, with the 10-year Treasury yielding 5.31% on October 5, 2026, and they still tend to rally in recessions. They are a weaker hedge against inflation or rate shocks, so investors who want crash protection should add explicit hedges rather than rely on bonds alone.
Key takeaways
- The stock-bond correlation was negative from 2001 to 2021 and has been positive since 2022; it was +0.38 in October 2026.
- Inflation decides the sign: windows with core CPI above 3% averaged +0.40, below 2% averaged −0.37.
- Growth shocks push stocks and bonds apart; inflation and rate shocks push them together.
- In 2022 the S&P 500 fell 19.4% and the 10-year Treasury about 16%, so a 60/40 mix lost about 18%.
- Core inflation of 2.45% in August 2026 sits in the uncertain middle band, where the correlation has averaged slightly negative but swung widely.
- Use bonds for income and recession protection; use options for crash protection that doesn’t depend on correlation.
Sources and method
- Core CPI (all items less food and energy) via FRED (CPILFESL) — BLS data, monthly, through August 2026
- 10-Year Treasury Constant Maturity Rate via FRED (DGS10) — 5.31% on October 5, 2026
- S&P 500 via FRED (SP500) — monthly returns, 2016 to 2026
- Nasdaq Composite via FRED (NASDAQCOM) — monthly returns, 1990 to 2026
- Federal Reserve, Federal Open Market Committee — policy rate decisions
Correlations are rolling 36-month correlations of monthly equity returns with the negative change in the 10-year Treasury constant-maturity yield (a proxy for bond returns), calculated by Proflex from FRED data. The long history uses the Nasdaq Composite (from 1990); the S&P 500 figures use FRED’s S&P series (from October 2016). Inflation bands use the average year-over-year change in core CPI over the same 36 months. The 2022 Treasury return is estimated from monthly yield changes with an assumed 8.5-year duration plus coupon accrual.