Does the negative relationship between stocks and interest rates always hold? As explained previously, the correlation between stocks and bonds (and therefore interest rates) fluctuates significantly. In the report by Deutsche Bank, strategist Francesco Curto examined the relationship between stocks and bonds in 1994. In 1994, the Fed had kept rates at 3 percent for three years in order to help the economy recover from the savings and loan crisis. Then the Fed unexpectedly raised the Fed funds rate by 25 basis points.
During the last week of May, the rate on the 10-year Treasury bond rose to 2.15 percent, the highest since April 2012. Since bonds are priced off of the Treasury spot rate curve (both in discounting the present value of the bonds’ future cash flows and in the spread relative to the spot rate curve ), it was not surprising that the value of the majority of bonds dropped at the same time. However, the stock market also gave back some of its double-digit gains for the year.