Why Stocks and Bonds Are Moving Together Again

For decades, investors have relied on a simple idea: when stocks fall, government bonds can help cushion the blow. That assumption underpins everything from retirement portfolios to pension fund strategy.

New research from Associate Professor Carolin Pflueger and her coauthors suggests that this relationship is neither stable nor guaranteed—and may be shifting again today.

The paper documents a striking historical pattern: In the late 20th Century, stocks and government bonds tended to move together, meaning bonds behaved like risky assets. Beginning around 2000, that relationship flipped: bonds began to rise when stocks fell, acting as a “safe haven” for investors. This shift helped stabilize portfolios during events like the 2008 financial crisis, when bond prices surged while equities collapsed.

More recent data, however, point to a possible turning point. In the years following the COVID-19 pandemic, many advanced economies experienced rapid increases in interest rates and the highest inflation in decades. During parts of 2022 and 2023, both stocks and bonds fell simultaneously—an outcome that surprised investors and challenged the traditional logic of diversified portfolios. Pflueger’s paper shows that such episodes are not anomalies, but rather reflect deeper changes in the economic environment that determines how assets move together.

To understand why, the authors highlight the importance of inflation and its underlying causes. When inflation is driven by strong economic demand, bonds are more likely to offset stock market losses. But when inflation is driven by supply disruptions (such as energy price shocks or geopolitical events) both stocks and bonds can decline at the same time. Recent events, including pandemic-related supply constraints, the 2026 oil shock, and geopolitical instability with wars in Iran and Ukraine fit squarely into this latter category.

Monetary policy plays a central role in shaping these dynamics. When central banks respond aggressively to inflation, especially when that inflation is driven by supply factors, their actions can reinforce the tendency for stocks and bonds to move together. In this environment, expectations about policy become just as important as the underlying economic shocks in determining market outcomes.

As Pflueger explains, “One lesson for central banks is that bonds are not always a safe haven. In an environment where inflation risk is elevated, tightening monetary policy can put simultaneous pressure on both stocks and bonds, which amplifies movements in overall financial conditions.”

The research also shows that these relationships become more pronounced during periods of heightened uncertainty. When investors demand greater compensation for risk, the degree to which stocks and bonds move together tends to increase in magnitude—whether positive or negative. 

Taken together, the findings suggest that one of the financial system’s most basic assumptions—that government bonds reliably hedge stock market risk—rests on economic conditions that can change. As inflation, policy responses, and global risks evolve, so too does the role that bonds play in stabilizing markets.

The paper is co-authored with John Y. Campbell and Luis M. Viceira, both of Harvard University. It draws on a substantial body of research in asset pricing and macroeconomics to advance understanding of how government bond risks evolve over time and how those risks are shaped by macroeconomic conditions and monetary policy.