For decades, government bonds helped balance equity risk because stocks and bonds often moved in opposite directions. Omnigence research shows that this relationship shifted sharply between 2021 and 2025, as inflation and rising interest rates caused the two asset classes to move together more frequently.
The paper examines how positive stock-bond correlation has affected portfolio diversification, risk and the traditional 60/40 portfolio. It finds that the diversification benefit associated with bonds was absent during the recent period, contributing to higher portfolio volatility.
If positive stock-bond correlation persists, investors may need to seek diversification from assets whose returns are driven by factors other than the interest-rate environment affecting both public stocks and bonds.