There's Still the Incentive for Rebalancing From Stocks to Bonds

US stocks are extremely overbought compared to Treasuries, reaching levels seen only 5% of the time in the last 50 years. This valuation gap, combined with high yields and normalizing correlations, is driving a significant rebalancing from equities into bonds.

Key Takeaways

• 1.The S&P 500 is historically overbought relative to Treasuries, reaching its 95th percentile over a 50-year lookback period.
• 2.Elevated yields in 10-year and 30-year Treasuries (approx. 4.70% and 5.20% respectively) are incentivizing rebalancing flows from stocks to bonds.
• 3.Structural stock-bond correlations have returned to near zero, enhancing the diversification benefits of bonds for equity allocators.

Table of Contents

• Stocks Are Very Overbought vs Treasuries
• Speculators Are Reducing Their Net Long in Stocks vs Bonds
• Stocks vs Bonds Back to Flat Correlation

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