Bond–Stock Price Comovements: Evidence from the 1960s to the 1990s

The correlation between sovereign bond prices and stock prices was positive from the 1970s to 2000 and then turned negative. Researchers have investigated this phenomenon using data from the 1970s to the present. This paper uses data beginning in the 1960s, when there was a negative correlation between bond and stock prices, to investigate how positive bond–stock price comovements arose. Evidence from identified vector autoregressions indicates that monetary policy shocks beginning in the late 1960s moved bonds and stocks in the same direction, causing bond and stock prices to covary positively. Evidence from estimating a multi-factor model indicates that news of both monetary policy and inflation drove bonds and stocks in the same direction, contributing to positive bond–stock comovements. These findings imply that rising inflation that elicits contractionary monetary policy could alter bonds’ risk characteristics, causing them to covary positively with stocks. Policymakers today should be vigilant that large budget deficits and other factors do not stoke inflation.