Question

Can there ever be a bull market where the price of bonds moves in the same direction as stocks? Can there ever be a bear market where the price of bonds moves down in the same direction of stocks?

Answer 1

Bonds don not trades like stocks, a bond represents a loan which is being given to the issuer by the purchaser, it is issued either on par, premium or discount to its original price. Bonds is a fixed instrument and the risk involve in a bond is far lesser than equity market, and by a general rule more the risk, more is the return involved, therefore if the prices of stock will go up, then investors will be less risk averse and will invest their money in stocks in anticipation for better returns. Also, there is a inverse relationship between bond prices and stock prices, they both move in opposite direction. It is a simple logic that if a investor would be getting a higher rate of return in stock market in a bull run, then he will sell his bonds which is giving him a fixed rate of return and invest the proceeds in stock market, this will lead to a decline in bond prices. As long as rationality of an investor will exist, it is not possible to have a bull market in which the both bond and stock prices will go up. Same is the case with bear market, in a bear market the prices of stocks will fall sharply and a rational investor will become risk averse and will be looking for safe heaven like bonds, this will drive the bonds prices up. However, there is a scope of a bear market in which both bond and stock prices go down, in a situation like great depression and prolonged recession, people prefer to stay on cash instead of investing the same anywhere, not even bonds. In that case, the bond prices may also fall with prices of stocks but only in worst case scenario, otherwise bond prices tends to move in opposite directions.