Negative Correlation Between U.S. Treasury Bonds And Stocks

The negative correlation that has existed between U.S. Treasury bonds and broader equities over the past 30 or so years is well known, and anchors the classic case for using long-duration bonds to buffer equity drawdowns.

When equities sell off in a crisis, central banks often step in, buying fixed-income assets and targeting lower reserve borrowing rates to and among banks in an attempt to reduce short-term interest rates. Treasuries often rally as investors flee from equity volatility into high-quality bonds, further lowering and flattening the yield curve. In these environments, where short-term market shocks often lead to rapid rate cuts, the market value of long duration bonds rises sharply, cushioning equity drawdowns.

That protection reflects a specific macroeconomic regime, not a universal law. It holds in demand shocks, where growth collapses and rates are cut; in the 2022 inflation shock, rates rose and stocks and long bonds fell together (section “MPT Under Deep Uncertainty”). Hold the bond sleeve as a hedge against growth shocks, and hedge inflation with something else.