The traditional portfolio strategy of 60% stocks and 40% bonds relies on Treasuries providing a safety net when equities fall. That dynamic is now under severe pressure.
Stocks and bonds are moving in lockstep at levels not seen in two decades. The 60-day correlation between S&P 500 and Treasury returns has surged to its highest since the early 2000s, undermining the diversification benefit.
Persistent inflation is the root cause. The April CPI rose 0.6% month-over-month, pushing the annual rate to 3.8%. The 10-year Treasury yield has climbed to 4.59%, while the 30-year yield has breached the psychological 5% threshold.
Rising energy prices are compounding the problem. Brent crude is near $109 a barrel, adding to consumer price pressures and complicating the Federal Reserve's path.
"The value proposition of bonds in a portfolio is really quite challenged," said Jonathan Cohn at Nomura.
Investors are shifting capital to shorter-term Treasuries to reduce interest rate risk. This move is pushing long-term yields higher, which in turn raises borrowing costs on mortgages and corporate debt.