The markets for equities and government bonds have returned to their long-term pattern of moving in opposite directions as a result of a U.S. tax cuts deal that is expected to boost spending there.
News of the deal fueled optimism for the U.S. economic outlook while sparking inflation concerns, triggering a sell-off in bonds and sending stocks to two-year highs -- ending a period in which the two asset classes have tracked each other.
The two asset classes had both been rallying over the past few months, prompting concerns that one of them was getting ripe for a swift change of direction.
Government bond prices have not been reflecting the economic fundamentals, but rather exceptional measures put in place as well as their safe-haven characteristics, Christophe Donay, head of strategy at Pictet, said.
People shouldn't underestimate the risk of a major correction if the economy emerges from the crisis next year.
Both asset classes have been boosted by the ample liquidity and expectations of further quantitative easing from the Federal Reserve, but this week's deal in Washington to extend tax cuts sparked sharp losses in U.S. Treasuries, hit by worries of inflation and a swelling U.S. budget deficit.
After being positive for most of November, the correlation between 10-year U.S. Treasury futures and the S&P 500 <.SPX> has fallen back into negative territory this month, at -0.26 on a rolling 25-day average on Thursday.
Excluding a blip in April during the heat of the Greek debt crisis, the correlation has been oscillating between -0.35 and -0.82 percent this year, before starting to rise in mid-October.
The correlation between German Bund futures and the STOXX Europe 600 index <.STOXX> hit -0.43 on Thursday, its lowest level since late October, and following a foray in positive territory in November. Excluding April, the correlation has been bouncing between -0.25 and -0.89 this year.