Why people are worried about the bond-equity relationship | The Economist

Why people are worried about the bond-equity relationship

Buried in the quant argot is a fear of a return to 1970s-style inflation

MOST PEOPLE have little time for quants. They find the language of quantitative finance far from illuminating. Even fairly numerate people struggle to grasp what comes easily to pointy-headed number-crunchers. Take the idea of correlation, the co-movement of two or more variables. Such relationships vary with the period over which they are measured. The direction can shift. Things quickly become confusing.

Yet the quant argot is useful when considering perhaps the biggest fear stalking financial markets: a sustained rise in inflation that would be bad for both equities and bonds. A quant might describe this as a flip in the bond-equity correlation from negative to positive. That is none too elegant, though. A better choice is a term used in geopolitics as well as econometrics: regime change.

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