At the end of the day on Tuesday, February 6, 2018, a snapshot of the Dow and 10 year Treasuries was as below:

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At the dip of the stock market on Tuesday, there was also a dip in the yield of the 10-year notes (red line on the images).

I want to know if the following would be a good interpretation:

As the marked plunged in the middle of the day on Tuesday, big investors cashed out of the stock market and sought refuge in the bond market. At the lowest point in the graphs (middle of the day), the yield of the 10 year notes went down as more demand for bonds raised their price. At the end of the day, the stock market bounced back, and the 10 year Treasuries price went down (yield moved up).


I'm explaining it to myself. Basically, I want to make sure that the underlying ideas are not messed up: risk aversion makes money flow from stocks to bonds; this results in a rise in the price of bonds, which, in turn, decreases the yield. Also, not being even close to a professional investor, I wanted to know if the effect (the velocity) is that fast as to almost be able to superimpose both graphs.

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  • Seems reasonable explanation. But who is your audience ? And only 10 year Treasuries ain't enough. What about others ? A larger data set would be much easier to explain the phenomenon. – DumbCoder Feb 7 at 11:56
  • @DumbCoder I'm explaining it to myself. Basically, I want to make sure that the underlying ideas are not messed up: risk aversion makes money flow from stocks to bonds; this results in a rise in the price of bonds, which, in turn, decreases the yield. Also, not being even close to a professional investor, I wanted to know if the effect (the velocity) is that fast as to almost be able to superimpose both graphs. – Toni Feb 7 at 12:18
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    Market "interpretations" are just talk, which means nothing. Your "interpretation" sounds as sensible as any you may hear on finance TV shows. You (and nobody else) has the slightest idea why the market went up or down. – Fattie Feb 7 at 13:08
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    If you look at longer term periods, you'll see that sometimes they correlate and sometimes they don't. – Bob Baerker Feb 7 at 13:17

I don't think that 'risk aversion' is responsible for the dynamics you are describing; 'risk aversion' is a parameter that describes appetites toward risk-taking. More risk averse investors will probably hold a greater share of their portfolio in (relatively) 'safe' investments as contrasted with risk loving investors who would be expected to hold a greater portion of their portfolio in high(er)-yielding less 'safe' assets.

What drives behaviour in this case are expectations about the future value of assets; expectations are formed condional on existing risk appetites.

A plausible interpretation of what happened is that the change in the chair of the FED along with more encouraging labour compensation data induced expectations for rate hikes ahead of impending inflation pick-up.

In anticipation of rate hikes, it makes sense to rebalance portfolios that were initially composed for a given relatively low risk free rate.

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