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Diversification breakdown

On the chart below you can see the 3 year rolling correlation of monthly returns between the S&P500 index and the long term treasuries. The chart goes back 70 years and after spending almost 20 years on negative #correlation territory between both, meaning there was a #diversification benefit, it has now turn positive starting on 2022. Not only that, but the positive correlation coefficient has reached a 20 year high, similar to the existing one during the dot.com era. This has implications for balanced portfolios/strategies that use bonds and stocks, and may force investors to introduce liquid alternatives in the mix to help with diversification. If we look for the genesis of this penomenon, it could be quantitative tightening, as it coincides with the last few years where correlations became less negative and it’s now in place since June ‘22.


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