Treasury yields hint at further rises for stocks?

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Treasury bond yields which continued to fall to record lows in early June have begun to turn up in recent days as we can see from the chart below. Falling bond yields are of course symptomatic of economic weakness. The chart below compares the yield on the 10-Year T-Note (green bars) to the S&P 500 since the start of 2011. There’s a positive visual correlation between the two markets, which is confirmed by the 60-day so called Correlation Coefficient (below chart). The current correlation is a very high .92 – ie the rise and fall almost in tandem.

Falling bond yields during the first half of 2011 led to a stock market correction over the summer. Both bottomed together at the start of October. After that, stocks rose while bond yields stayed generally flat. Notice that a drop in the bond yields in mid-March led to a peak in stocks a couple of weeks late. Both have fallen together since then. The chart below suggests the potential for higher stock prices if bond yields continue to rise.

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