My Tuesday message showed falling commodity prices weighing on stock values. The same is true with Treasury bond yields which have fallen to record lows. Falling bond yields are symptomatic of economic weakness. Chart 1 compares the yield on the 10-Year T-Note (green bars) to the S&P 500 since the start of 2011. There's a positive visual correlation between the two markets, which is confirmed by the 60-day Correlation Coefficient (below chart). The current correlation is a very high .92. Falling bond yields during the first half of 2011 led to a stock market correction over the summer. Both bottomed together at the start of October. After that, stocks rose while bond yields stayed generally flat. Notice that a drop in the bond yields in mid-March led to a peak in stocks a couple of weeks late. Both have fallen together since then. The chart suggests it may take a higher bond yield to support higher stock prices.
