Bond-stock Price Comovements: Evidence from the 1960s to the 1990s

The U.S. must sell enormous quantities of Treasury bonds to finance its mushrooming debt. As Treasury bonds become riskier, the U.S. must offer higher interest rates to find willing holders of its debt.

In theory, bonds’ risks should depend on their comovements with stocks. Stocks are risky. If bonds covary positively with stocks, they are thus risky also and investors will require a higher return to hold them. Campbell et al. (2025) reported that bond and stock prices covaried positively from the 1970s to around 2000. Their covariances then turned negative. Pflueger (2025) found that the combination of inflationary shocks (e.g., oil price increases) are necessary to produce positive bond-stock covariances over the latter period.

This paper investigates bond-stock comovements beginning in the 1960s. Figure 1 shows all the quarters when there was a statistically significant relationship between bond and stock prices. The correlations became positive and significant beginning in 1967Q4. At this time inflation accelerated and the Fed aggressively fought inflation. Between 1967Q4 and 1971Q3 the correlations are positive and statistically significant in 10 of the 16 quarters. There are no statistically significant betas between 1971Q4 and 1974Q2. Monetary policy remained dovish for much of this time even though inflationary supply shocks multiplied. After this, betas are positive and significant in 49 quarters. They are never negative. The correlationss are especially large between 1979Q4 and 1981Q3. During this time, the Iran Crisis pushed energy prices up 40% and the Federal Reserve fought inflation.

The paper finds that an increase in the correlations between bonds and stocks is closely related to an increase in the yield on Treasury bonds. Investors require higher interest rates to hold bonds as they become riskier. This in turn multiplies government debt service costs. To reduce interest costs on its mushrooming debt, the U.S. government should be vigilant to reduce the riskiness of its bonds. Results in the paper indicate that one way to do this is for the U.S. to reduce its budget deficit.

Notes: The observations represent regression coefficients from regressing daily returns on 7-year U.S. Treasury bonds on daily returns on the Standard and Poor’s 500 index. The regressions are performed quarterly between 1964Q1 and 1991Q4. The figure presents all quarters when the betas are statistically significant at the 10% level using heteroskedasticity and autocorrelation consistent standard errors.