Do bonds go up when stock market goes down?

Do bonds go up when stock market goes down?

do bonds go up when stock market goes down? Short answer: often — but not always. High-quality government bonds have historically rallied during many equity drawdowns because investors flee risky assets and because recession expectations push yields lower. However, this inverse relationship can break down in inflationary or rapid-hiking regimes, so bonds are a conditional hedge rather than an absolute one.

As of 22 January 2026, according to the practitioner literature and multiple market reports summarized below, the historical record shows time-varying stock–bond behavior driven by inflation, growth expectations, and central-bank policy.

Background — what are stocks and bonds?

Stocks and bonds are the two large pillars of public capital markets, but they represent different economic claims and respond to different drivers.

• Stocks (equities) represent partial ownership in a company. Share prices reflect investors' expectations for future corporate profits, growth prospects, and risk appetite. Equity returns are driven by earnings, profit margins, macro growth, sentiment, and risk premia.

• Bonds are debt instruments. When you buy a bond you are lending money to an issuer (government, municipality, corporation) in exchange for scheduled interest (coupon) payments and the return of principal at maturity. Bond prices move mainly with changes in interest rates and perceived credit risk. When yields fall, bond prices rise; when yields rise, bond prices fall.

Key differences in plain terms:

• Ownership vs. creditor claim: stockholders own a share; bondholders are lenders.
• Drivers: stocks ≈ earnings and growth; bonds ≈ interest rates, inflation expectations, and credit risk.
• Risk profile: equities are typically more volatile and offer higher long-term returns; bonds generally provide lower volatility and predictable cash flows (unless the issuer defaults or inflation erodes real value).

Understanding these differences explains why bonds can sometimes offset equity losses and why that offset is not guaranteed.

Typical (historical) stock–bond relationship

Over multi-decade periods—especially in low-inflation developed-market regimes since the late 1990s—stocks and high-quality government bonds have often shown a negative correlation. In plain language, that means when equities fell sharply, government bonds frequently rose.

Practitioners and portfolio constructors leaned on this behavior to justify balanced allocations (for example, the classic 60/40 equity/bond portfolio). In many equity drawdowns (2000–2002 tech bust, 2008 global financial crisis, parts of 2011 and 2015), U.S. Treasuries and other high-quality sovereign debt delivered positive returns while equities fell, reducing portfolio drawdowns and volatility.

Over long spans, correlations are typically measured using rolling windows (e.g., 3‑ to 5‑year rolling correlations). Empirical work by asset managers and academics demonstrates that correlations move with the macro regime: during stable, low-inflation periods the stock–bond correlation tends to be negative; during inflationary shocks or rapid central-bank tightening it can become zero or even positive.

Why bonds often rise when stocks fall

Several mechanisms explain why government bonds frequently rally when equities drop. Each mechanism is a channel by which investor behavior or macro expectations push yields down and bond prices up.

• Flight to quality and liquidity: In stress periods, investors sell risky assets and move into perceived safe havens—often sovereign bonds of highly rated issuers. That buying pressure raises bond prices and lowers yields.

• Interest-rate channel (policy easing and growth expectations): Equity weakness often signals slowing growth or recession. Expected policy easing or lower term premium leads market yields to fall. Lower yields raise bond prices.

• Inflation expectations: Falling growth tends to damp inflation expectations. If markets reprice lower expected inflation, real yields and nominal yields can fall, supporting bond prices.

Each channel connects to hedging behavior: investors buy bonds to preserve capital or lock in yield when equity risk rises. Because bond prices are inversely related to yields, those flows can produce price appreciation in bonds concurrent with equity declines.

When bonds and stocks move together (and why)

The inverse relationship is not a law. There are clear exceptions—situations where stocks and bond prices fall together. Key scenarios include:

• Rising inflation and aggressive rate hikes: If inflation picks up and central banks respond with rapid rate increases, bond yields rise sharply, pushing bond prices down. Higher discount rates also reduce equity valuations, creating a scenario where both asset classes fall.

• Inflation shocks that erode real returns: Unexpected inflation raises the required returns across assets. Unless bonds are inflation-protected, both nominal bonds and equities can suffer.

• Liquidity-driven selloffs where all assets are liquidated: In some stressed moments, forced selling and margin calls can push both equities and bonds lower if investors need cash or deleveraging is widespread.

Recent example — 2022: A widely cited episode where the typical hedge did not work. In 2022, high inflation and aggressive central-bank tightening led to rising yields and negative returns for both U.S. equities and nominal government bonds in many markets. This year highlighted how the correlation can flip positive when real rates and inflation dominate the regime.

Historical inflationary decades (1970s): Earlier periods with elevated and volatile inflation also saw weaker or positive stock–bond correlations. That decade is often cited as a reminder that bonds are not guaranteed hedges against equity losses when inflation surprises are the dominant force.

Types of bonds and differing hedge effectiveness

Not all bonds behave the same during equity stress. Hedge effectiveness depends critically on issuer credit quality and duration (sensitivity to interest rates).

• U.S. Treasuries: Often the primary flight‑to‑quality asset. High liquidity and near-zero credit risk make Treasuries a default hedge during risk-off episodes.

• Long-duration government bonds: These are most sensitive to changes in yields. When recession expectations or policy easing push yields down, long-duration bonds often deliver the strongest positive returns and act as an effective hedge.

• Short-term Treasuries: Less price sensitivity to yield moves, so they offer safety of principal but limited price appreciation when yields fall.

• Corporate bonds: Carry credit risk. In systemic equity selloffs, corporate spreads can widen, producing negative returns despite any fall in base yields. Lower-quality corporates may fall alongside equities.

• TIPS (Treasury Inflation-Protected Securities): TIPS protect real principal against rising inflation. In inflationary shocks, TIPS can outperform nominal Treasuries and equities. However, TIPS will not always rise when equities fall—if deflationary recession expectations dominate, TIPS may underperform nominal Treasuries.

Duration and credit quality therefore shape whether a bond position acts as a reliable hedge. For portfolio hedging, longer-duration high-quality sovereigns historically provided the most consistent offset to equity drawdowns in low-inflation regimes.

How to measure the relationship (metrics and interpretation)

Several metrics help investors quantify how bonds and stocks move together, but each has interpretation caveats.

• Correlation: Measures co-movement between two return series. A negative correlation implies opposite moves on average; a positive correlation implies same-direction moves. Correlation is scale-free but does not indicate which asset outperforms or the magnitude of protection.

• Beta: Measures sensitivity of one asset’s returns to the other. Bond beta to equities (or vice versa) can quantify how much bonds have moved during equity swings historically.

• Rolling correlations (e.g., 3‑year, 5‑year): Useful to see how the relationship evolves over time and across regimes. Rolling measures reveal that correlation is time-varying.

• Relative return and drawdown analysis: Examining how bonds performed during equity drawdowns (absolute returns and peak-to-trough behavior) often gives clearer economic meaning to a hedge than correlation alone.

Interpretation notes:

• Correlation can be low even if bonds generate strong positive returns in crisis windows. Conversely, a negative correlation does not guarantee positive bond returns in every drawdown.

• Time aggregation matters: daily, monthly, and annual correlations can differ substantially.

• Regime dependence: metrics should be read against macro conditions (inflation, growth, monetary policy). Historical averages can be misleading if the current regime differs.

Empirical evidence and regime dependence

Empirical studies from asset managers and academics highlight that the stock–bond correlation is highly regime-dependent:

• Low-and-stable-inflation regimes: These periods typically show negative stock–bond correlations. Bonds have often appreciated during equity crises driven by growth fears.

• High-inflation or rapid rate-hike regimes: Correlations can become zero or positive. Bonds may fall with equities as yields rise and discount rates increase.

• Real-rate shocks and risk-premium shifts: Changes in risk premia (term premium, equity risk premium) can alter the co-movement in ways that average correlations miss.

Practitioner research (Vanguard, AQR, PIMCO, Russell) commonly documents these shifts using rolling correlation windows and scenario analysis. Many papers emphasize that the protective power of bonds is conditional and that stress tests should include inflation-driven scenarios, not only growth recessions.

Implications for portfolio construction

Given the time-varying nature of the stock–bond relationship, prudent portfolio design recognizes both the historical benefits and the limits of bonds as hedges.

• Classic diversification: Historically, adding high-quality government bonds to an equity allocation reduced portfolio volatility and peak drawdowns, which underpins allocations like 60/40.

• Size and duration matter: The hedge depends on how large the bond allocation is and what duration profile it carries. Longer-duration government bonds historically provided greater downside insurance in many equity selloffs during low-inflation regimes.

• Active risk/regime management: Because the hedge can fail in rising-rate episodes, investors may want to adjust duration, add inflation-protected securities (TIPS), or include other diversifiers (commodities, cash, alternative strategies) depending on the macro outlook.

• Rebalancing discipline: Systematic rebalancing (selling appreciated assets to buy cheaper ones) can capture the diversification benefit even when correlations change, because it locks in gains from assets that have rallied while buying those that have fallen.

Practical guidance for investors

• Match bond duration to your hedge objective: If you seek protection against equity drawdowns driven by growth shocks and falling yields, longer-duration Treasuries historically worked well. If inflation risk dominates, TIPS are more appropriate.

• Prefer high-quality sovereign bonds for flight-to-quality: Liquidity and credit safety matter in stress episodes.

• Monitor central-bank paths and inflation signals: Rapid changes to policy expectations are key drivers of whether bonds will hedge equities.

• Maintain rebalancing rules: Don’t assume bonds will always offset equity losses; instead, rely on disciplined portfolio rules that capture diversification benefits over time.

• Diversify across bond types and asset classes: Corporate credit, short-duration instruments, and inflation-protected bonds have distinct behaviors—use them to refine exposures rather than rely on a single bond sleeve.

Note: This is educational content, not investment advice. Always consider your risk tolerance and consult qualified professionals.

Limitations, risks, and common pitfalls

• Interest-rate risk: Bond prices fall when yields rise. If rising rates are the driver of equity stress, bonds may also decline.

• Inflation risk: Nominal bonds lose real purchasing power with higher-than-expected inflation; TIPS mitigate this risk but behave differently across regimes.

• Credit risk: Corporate bonds can suffer during economic stress as default risk and credit spreads widen.

• Overreliance on correlation: Historical correlations can change. Building strategy only on past averages can lead to mistaken confidence.

• Static allocations: A fixed allocation ignores regime shifts. Tactical adjustments and stress testing help manage regime risk.

Notable historical episodes (brief)

• 2008 financial crisis: U.S. Treasuries rallied strongly as equities plunged. Flight-to-quality and policy easing expectations drove yields down, helping bonds offset equity losses.

• 2022 global selloff: Both stocks and nominal government bonds declined as inflation was high and central banks enacted rapid rate hikes. This episode showed that bonds do not always rise when stocks fall.

• 1970s inflationary era: Persistent inflation and real-rate dynamics contributed to periods when equities and nominal bonds moved together negatively.

• 2020 COVID-19 shock (March 2020): Initial liquidity stress briefly pressured some bond segments, but high-quality sovereign bonds later rallied as central banks eased and investors sought safety.

How professionals analyze crises: a few practical metrics

• Crisis-window returns: Compare bond returns during the worst equity drawdown windows (peak-to-trough) to see actual hedge performance.

• Rolling correlation heatmaps: Visualize how correlation evolves over time and across different lookback windows.

• Scenario stress tests: Model equity losses under various macro shocks (growth collapse, inflation surge, stagflation) and simulate bond performance under each.

• Duration and spread decomposition: Separate the contribution of duration (rate moves) and credit-spread changes to bond returns to understand drivers.

See also

• Flight to quality
• Duration and interest-rate sensitivity
• Treasury Inflation-Protected Securities (TIPS)
• Portfolio diversification and 60/40 allocation
• Rolling correlations and regime analysis

References and primary sources

• Vanguard research on stock–bond correlations and portfolio construction (practitioner notes and white papers). As of June 2024, Vanguard and other large asset managers continued to highlight regime dependence of correlations.

• AQR and PIMCO research on time-varying correlations and bond hedge effectiveness (papers and market notes discussing the 2022 episode and historical regimes).

• Econofact explainer on why bonds sometimes fail to hedge equities (regime perspective and 2022 reference points).

• NPR and Marketplace coverage explaining mechanics behind 2022 co-movement of stocks and bonds (why higher rates can hurt both markets).

• Russell and academic analyses on rolling correlations and the role of inflation in flipping stock–bond relationships.

Sources listed above reflect practitioner and academic consensus that bonds are a conditional hedge. Where specific dates are required for timeliness: as of 22 January 2026, market commentators and institutional notes have continued to reference 2022 as a turning point demonstrating regime risk in the stock–bond relationship.

Practical next steps (for readers)

• Review your portfolio’s bond allocation and duration relative to your risk goals.

• If inflation risk is a primary concern, consider allocation to inflation-protected instruments.

• Maintain rebalancing rules and use stress tests that include inflationary as well as recessionary scenarios.

• For spot and margin trading or to explore fixed-income exposure on an exchange focused on digital assets and derivatives, consider Bitget’s platform and Bitget Wallet for custody and portfolio management tools. Explore Bitget features and educational materials to understand how bond-sensitive instruments and macro events can affect multi-asset portfolios.