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Stocks and bonds are linked through growth, inflation and the discount rate. The relationship is not fixed: sometimes equities rise alongside yields (growth optimism), and sometimes equities fall as yields rise (rate shock). Your edge is to identify which regime you are in.
Intermarket signals are best used as context and confirmation. The goal is to identify the regime and the dominant driver, then map it to your instrument and timeframe.
Each concept below is written as a practical trading tool: definition → why it moves prices → how you use it.
What it means: Higher bond yields increase the rate used to discount future cash flows, which can reduce equity valuations.
Why it matters: Growth stocks (cash flows further in the future) are typically more sensitive to yield moves than value stocks.
How to apply it: If yields break higher sharply, be cautious buying high-duration equities; look for confirmation that yields are stabilising before adding risk.
What it means: In a growth regime, yields rise because growth improves. In a rate-shock regime, yields rise because inflation/rates reprice aggressively.
Why it matters: In the first case, equities can rally (earnings outlook improves). In the second, equities can sell off (valuation compression dominates).
How to apply it: Classify the yield move: is it driven by better growth or by tighter policy/inflation fears? Trade equities accordingly.
What it means: During stress, money often moves into safer government bonds, pushing yields down while equities fall.
Why it matters: Correlation flips negative: equities down, yields down.
How to apply it: If equities are falling and yields are also falling, treat rallies as lower-quality until risk sentiment improves.
What it means: The shape of the yield curve reflects expectations for growth and policy.
Why it matters: A rapid re-pricing in the front-end can signal tightening stress; longer-end moves can reflect inflation and term premium.
How to apply it: Use curve moves as context: front-end shocks often hurt risk assets more than gradual long-end moves.
Practical trading workflow
Example
If yields jump after a hawkish central bank signal and equities sell off immediately, that is often a rate-shock regime. A safer approach is to wait for yields to stabilise (or pull back) before buying dips.
No. If yields rise due to stronger growth expectations, equities can rally. Context matters.
Because more of their expected value is in the distant future, which is discounted more heavily when rates rise.
Use yields as confirmation: if equities rally and yields also rise gradually, the move may have healthier growth backing.