Over the last few weeks, we have written about reaching the point of peak liquidity for the financial markets, where financial conditions are unlikely to get any easier and central banks are starting to at least discuss removing accommodation, with the result that this liquidity will slowly be drained from the system. Such a change could be associated with longer-term interest rates modestly increasing—particularly when the Fed may still be holding short rates lower for longer.
In this Economics Weekly, we discuss why investors are once again reexamining what an increase in longer-term yields might mean for the equity market, as well as the historical relationship between stocks and bonds and whether we might be at a major inflection point in that correlation.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.