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Debt/e mini price dynamics


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Debt/e mini price dynamics

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  #1 (permalink)
sauldanielrodgers
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People say that the e mini is negatively correlated with 10year / 30 year debt. When treasuries/bonds tick down, the e mini can tick up and this is said to be due to asset reallocation.

However it is also stated that higher interest rates result in a sell off in stocks which may be due to margin dynamics. If rates are high, bonds are low.

Does this mean that short term downward pressure on bonds can result in higher prices in the S and p where as sustained lower prices in bonds (higher interest rates) can result in lower prices in the S and p?

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Mozart2112
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sauldanielrodgers View Post
People say that the e mini is negatively correlated with 10year / 30 year debt. When treasuries/bonds tick down, the e mini can tick up and this is said to be due to asset reallocation.

However it is also stated that higher interest rates result in a sell off in stocks which may be due to margin dynamics. If rates are high, bonds are low.

Does this mean that short term downward pressure on bonds can result in higher prices in the S and p where as sustained lower prices in bonds (higher interest rates) can result in lower prices in the S and p?

I know as a general rule of thumb when interest rates are low stocks like to go up and when Fed raises rates stocks tend to go down, creating an inverse relationship between notes and stocks and this was especially true when bonds were used as a safe haven... many times it comes down to the language and strategy used by the Fed, on how stocks may react based on day to day or what not...

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 Schnook 
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The correlations vary dramatically, and don't readily lend themselves to mean-reversion or correlation-based trading strategies. Oftentimes there are strong opposing forces in play that throw the correlations off completely.

A few general rules:
Broad economic growth is good for stocks, but often bad for bonds, because with growth often comes the risk of inflation which reduces the present value of future principal and interest payments. If, for example, the monthly employment report soundly beats expectations, you can expect stocks to rally and bonds to sell off, because a strengthening job market means consumers will have more income to spend on goods and services, allowing companies to raise prices and increase profits, making fixed-rate, longer duration bonds a much less attractive investment. This suggests negative correlation (stocks up, bonds down).

Increased uncertainty regarding the economic outlook translates to higher risk for investors. This, typically, leads to increased volatility, which makes the expected risk-adjusted returns of bonds more attractive than stocks. This scenario creates the "safe-haven" bid we often hear about in the bond markets. This, again, suggests negative correlation (stocks down, bonds up).

Rising interest rates (falling bond prices), can be bad for stocks, especially those of companies with large amounts of debt, because their financing costs will increase, thus exerting downward pressure on profit margins. Also, rising inflation reduces the present value of not only future principal and interest payments from bonds, but also future dividend payments from stocks. This suggests positive correlation (bonds down, stocks down).

Increasing broad market liquidity, the proverbail rising tide, can lift all asset classes. Aggressive debt monetization, for example, floods the markets with cash, pushing prices of stocks, bonds, and commodities higher all at once. Conversely, when liquidity conditions tighten and money flows out of the system, stock and bond prices can both go down together. This suggests positive correlation.

When you plot the stock / bond correlations over longer periods you will see that they frequently revert back and forth from positive to negative depending largely on the broader themes impacting financial markets over these time periods.

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