The Stock-Bond Correlation: A Tale of Two Days in the U.S. Treasury Market
Prof. Grace Xing HU
Associate Professor
PBC School of Finance
Tsinghua University
Date: 29 August 2025 (Friday)
Time: 14:30-16:00
Venue: E22-1002
Host: Prof. Rachel MA, Associate Professor in Finance
Abstract
Motivated by the central importance of U.S. Treasury (UST) and the growing concern over its resilience, we construct a high-frequency measure of stock-bond correlation to capture UST safety, and more importantly, its riskiness. On days with highly negative stock-bond correlation, UST serves as the premier safe asset – the demand for safety widens its convenience yield, shrinks its term premium, and decouples its comovement with U.S. Dollar (USD). On days with positive stock-bond correlation, UST becomes a risky asset, with increased volatility and higher term premium. Compared with other measures of UST riskiness, our measure is unique in capturing the dual and contrasting roles of UST – sounding the alarm when UST shifts abruptly from safety to risky due to concerns over interest-rate risk (e.g., FOMC announcement days), inflation shocks (e.g., the post-Covid inflation surge), dealer-capacity risk (e.g., 2020 dash for cash), and more recently, tariff-induced uncertainty. Contrasting the safety of UST against USD, we also document an unprecedented trend of sustained UST riskiness and the emergence of USD as the replacement safe asset since 2022.
Speaker
Prof. Grace HU Xing is currently an associate professor at PBC School of Finance, Tsinghua University. Prior to joining PBC School of Finance, she was an assistant professor in Finance at the University of Hong Kong between 2011 and 2019. Grace received her Ph.D. in Economics from Princeton in 2011. She also holds a B.S. in Computer Science from the University of Science and Technology of China, and a M.S. from Northwestern University.
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