Correlations between U.S. bond and equity indexes rose dramatically in the second quarter, denting the diversification properties fixed-income assets have typically offered. The 360-day correlation of the Bloomberg Barclays Aggregate Bond index, while still negative, rose to about -0.2 from -0.4 during the second quarter, while the corporate bond index peaked into positive territory for the first time since early 2007. Treasury correlations moved lower during the year, working to insulate investors from equity losses.
Quarter-to-date, the S&P 500 is up more than 20%, despite still being down 2.8% on the year. Corporate bonds have gotten a boost from the Fed, which began purchasing both investment-grade and high-yield exchange-traded funds.
The breakdown in the inverse relationship between debt and equity threaten the fundamental portfolio theory that losses in stocks can be offset by positive bond performance. While Treasury correlations have improved in this regard, investors shouldn't expect too much yield as the 10-year is currently paying 0.71%.