Question

State your opinion on whether you expect the correlation between stock returns and bond yields to be higher or lower in 2021 than in 2019. Explain why you have reached your conclusion.

Answer 1

I expect that correlation between stock returns and Bond yields to be higher in 2021 because there will be a recovery in the economic front and there will be a recovery on the stock market as well and stock market will be going higher and the bond yield will be also following it because it is to be noted that Bond yield is is inversely related to the bond price so what price will go down when the stocks will go up and hence the bond yield will go up in order to compensate that decline.

I think 2021 will be an year in which there will be recovery on the economic front after coming out of a fear of recession and coming out of the pandemic so it will be leading to recovery in the earnings of various companies which will be reflected on the stock returns and bond yield will also be going higher because Bond yield will also be recovering and providing with the higher rate of return on the expectation of economic recovery and recovery in the solvency of various companies so it can be said that bond yields will be providing with the higher correlation to that of stock return because both will be moving up and both will be moving in the same direction so there will be a higher correlation existing between the bond yields and the rate of return of stocks due to economic recovery.