Here’s What The Changing Stocks-Bonds Correlation Means For Equities When The Fed Tapers

The chart below shows how the correlation between U.S. Treasury yields and  the Dow Jones Industrial Average has varied under each iteration of the  quantitative easing program of bond purchases the Federal Reserve has employed  since the financial crisis. Under QE3 (the current iteration), changes in bond yields have have been  associated with larger changes in equity prices than under any other program.  So, when yields rise, so do equities, and when yields fall, so do equities — in  both directions moreso than in the past. The red square near the top of the chart plots the current levels of the  yield on the 10-year Treasury note and the DJIA. Its place above the regression  line shows that equities are looking rich based on this relationship.

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