Bonds vs stocks, and the yield curve

Everything so far has looked inside the stock market. Intermarket analysis looks beside it: at bonds, currencies, commodities and credit, on the premise that capital moves between them and that the moves leave tracks. The bond market is the largest of these and the one with the most to say about stocks. It is also the one where the relationship has changed most in living memory, which is the first lesson to learn.

Yields and prices

A bond's price and its yield move inversely. When traders "buy bonds" yields fall; when they sell, yields rise. Most intermarket discussion is in yields, so keep the inversion in mind: "yields up" means "bonds down".

The benchmarks:

Instrument	Horizon	What it mostly reflects
3-month bill / 2-year note	Short	Expected central bank policy over the next 1-2 years
10-year note	Medium	Growth and inflation expectations plus term premium
30-year bond	Long	Long-run inflation and fiscal expectations

For a stock trader the 10-year yield is the workhorse, and the 2-year is the second.

The correlation that flipped

The stock-bond relationship is not fixed. It depends on what is driving the economy.

Growth-driven regime (roughly 2000-2020): bad news for growth is good for bonds (safe haven, rate cuts expected) and bad for stocks. Stocks and bonds move opposite; yields and stocks move together. A 60/40 portfolio works because bonds hedge stocks.

Inflation-driven regime (2022 and, intermittently, since): inflation is bad for both. Higher yields mean tighter policy and lower valuations; stocks and bonds fall together. Yields and stocks move opposite. Bonds stop hedging stocks.

Growth regime:        yields ↑  →  stocks ↑   (good news is good news)
Inflation regime:     yields ↑  →  stocks ↓   (rate shock)

Before using any bond-stock relationship, check which regime is in force. The simplest way is a rolling 60-day correlation between daily changes in the 10-year yield and daily returns of the index. Positive means growth regime; negative means inflation regime. It flips over months, not days, and the flip itself is one of the most important intermarket events you can log.

Key idea: Stocks and yields move together when growth is the story and opposite when inflation is the story. Measure the current correlation before reading any bond move as bullish or bearish for equities.

Rate of change matters more than level

Equity markets tolerate high yields that got there slowly and struggle with fast moves at any level. A useful measure is the 20-day change in the 10-year yield in basis points:

20-day change in 10-year yield	Typical equity response (inflation regime)
Below -30 bp	Relief; long-duration growth stocks lead
-30 to +30 bp	Background; stocks trade on their own factors
+30 to +50 bp	Pressure on valuations; rotation to value/energy
Above +50 bp	Rate shock; broad selling, breadth deteriorates

In a growth regime the sign flips at the extremes: a 50 bp fall in yields is usually a growth scare, not a relief.

The yield curve

The yield curve is the plot of yields against maturity. Its slope is usually summarised as a spread: 10-year minus 2-year ("2s10s") or 10-year minus 3-month.

Normal (positive slope):        Inverted (negative slope):

yield │          ___──            yield │╲
      │     __──                        │ ╲___
      │ __──                            │     ‾‾──__
      │─                                │           ‾‾
      └──────────────── maturity        └──────────────── maturity
       3m  2y  5y  10y  30y              3m  2y  5y  10y  30y

Normal: longer yields above shorter. Lenders demand more for longer commitments. Consistent with expansion.

Inverted: shorter yields above longer. The market expects policy to be eased in future, which it expects because it expects growth to slow. Inversions of the 2s10s spread have preceded every US recession of the last half century, with lead times of roughly 6 to 24 months.

That record is real, and it is almost useless as a stock timing tool for the same reason A/D divergences are: the lead time is long and variable. The S&P 500 has typically continued to rise for months after an inversion, sometimes by a lot. The inversion of 2022 was followed by a strong 2023.

The more actionable event has historically been the un-inversion, when the curve steepens back to positive because short rates fall faster than long rates (a "bull steepener"). That pattern has often coincided with the onset of the slowdown the inversion predicted, because the central bank is cutting into weakness. A curve that steepens because long yields rise (a "bear steepener") means something different: growth or inflation expectations rising, which is usually fine for cyclical stocks and bad for long-duration ones.

Curve move	Short end	Long end	Typical meaning	Stock read
Bull steepener	Falls fast	Falls slowly	Cuts into weakness	Historically risk-off
Bear steepener	Flat	Rises	Growth/inflation expectations rising	Cyclicals up, growth stocks down
Bull flattener	Flat	Falls	Growth scare, safe-haven bid	Defensive rotation
Bear flattener	Rises fast	Rises slowly	Hiking cycle	Pressure builds over time

Using bonds in the regime sentence

A swing trader does not need to forecast rates. Three lines in the morning routine are enough:

The 10-year yield's 20-day change, and whether it is a background or a shock.
The current stock-bond correlation sign, so you know how to read line 1.
The 2s10s slope and which way it moved this month, as slow background.

If yields are moving fast in the wrong direction for the regime, breadth is usually deteriorating at the same time, and Module 3's tools will show it. If they are not, the bond move is being absorbed and can be treated as background.

Failure modes

Reading a yield move without checking the regime. The same 40 bp rise is a bullish growth signal in one regime and a valuation shock in the other.
Trading the inversion. It is a slow macro warning with a multi-month lead. It goes in the journal, not the order ticket.
Ignoring the reason for a steepening. Bull and bear steepeners look identical on a spread chart and mean opposite things.
Using the level of yields as a threshold. "Stocks fall above 4.5%" was true until it was not. Rate of change, not level.

Try it: Download the 10-year yield and the S&P 500 for the past three years. Compute the rolling 60-day correlation between daily yield changes and daily index returns. Mark where it crosses zero. Then look at what the stock-bond narrative in financial media was saying at each crossing; you will often find the narrative lagging the data by weeks.

Recap

Bond prices and yields move inversely; the 10-year yield is the benchmark for stock traders.
Stocks and yields move together in growth-driven regimes and opposite in inflation-driven ones; measure the rolling correlation to know which applies.
Rate of change in yields matters more than level; fast moves cause rotations and shocks, slow moves are absorbed.
Yield-curve inversion is a reliable but very slow recession warning; the bull-steepening un-inversion has been the more timely risk-off event.
Log the 20-day yield change, the correlation sign and the curve slope; do not trade the curve directly.