Questions: "Wilfred, under what circumstances would bonds and equities drop together?"
Answer: High yield bonds or also known as junk bonds are positively correlated with equities.
Here is the 5 years correlation matrix of the various asset classes based on monthly returns on SGD:
The Bloomberg Barclays Global High Yield and Citi Global Emerging Markets US Dollar Government Bond are positively correlated with every other asset classes including equities.
On the other hand, the Bloomberg Barclays US Corporate Investment Grade and Citi World Government Bond are negatively correlated with equities.
One possible explanation is because when there is fear in the stock market, there tend to be fight towards safety such as government bonds and investment grade corporate bonds. Junk bonds and emerging market bonds are viewed as too risky to fly to.
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