Stock and bond prices usually move in opposite directions. When the stock market is not doing well and becomes risky for investors, investors withdraw their money and put it into bonds, which they consider safer. This increased demand raises bond prices. When stocks rally and the risk seems justified, investors may move out of bonds and into stocks, driving stock prices up further. In some circumstances, both stocks and bonds rise together.
Skepticism About Stocks
When stocks are doing well but investors remain skeptical about how long they will do well, stock and bond prices can rise together. This is because investors continue to put money in stocks but also put money into bonds just in case the stock market drops. This spreads the demand among stocks and bonds, and that demand causes prices to go up for each type of investment.
Confidence in Government and Corporations
Investors may have confidence that federal agencies and companies that issue bonds will remain in a financial position to make their interest payments on bonds. This boosts bond values. At the same time, that confidence can make company stocks look attractive, because companies seem to be growing. Investors reason that stock value should grow along with the company issuing the stock. In such a climate of confidence, stock and bond prices both can rise.
When interest rates remain low for an extended period, bonds tend to retain their value. Rising interest rates drive bond values down, because when rates get higher than what a bond pays, investors get better returns with new bonds issued at higher rates. They won't buy the older, lower-rate bonds. During periods of low interest rates, bonds retain their value or even increase in value because investors do not see better returns on the horizon with newer issues. At the same time, stocks remain attractive because interest rates are not eating into corporate profits for companies that borrow money. In such a case, both stocks and bonds can rise in price.
Rising inflation is the enemy of both stocks and bonds. As inflation rises, companies have to pay more for raw materials, products and supplies. This reduces their profitability. That makes both stocks and bonds riskier. When inflation is low, however, bond interest can pay an investor enough to beat inflation and have a profit. This makes bonds attractive, and their value rises. Simultaneously, because companies do not lose profitability to inflation, their stocks become attractive. Profitable companies tend to grow and their stocks grow with them. Under such circumstances, stocks and bonds rise at the same time.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.