wilmott.com

why is there a correlation? stock price leading bond price?discussion please.any publication on it?

I am copying few lines from an article published by Fed Reserve SFO. Hope this gives the answer! The actual link is given below.Corporate bond prices are determined not only by the interest rates in the economy but also by the credit risk borne by the bondholders. The credit risk in a corporate bond depends on the expected future cash flows of the issuing firm, which also determines the firm's stock price; therefore, information about the firm's cash flow prospects provides an important linkage between individual stocks and bonds that is absent from the aggregate stock and default-free bond prices. http://www.frbsf.org/econrsrch/wklyltr/el96-20.html

A rising stock price usually precedes increasing earnings which put the company in a better financial position to payoff the bonds in a timely manner.

Normally it is an inverse relationship. You can see clearly if you pull out the graph of DJIA and some bond indices. Reason being interest rate is generally higher when stock market is doing well, therefore higher interest rate would depress the bond prices.

i guess, correlation between a bond index and stock index and correlation between stock and bond froma specific issuer would behave differently if you look at data, though theory wud predict same behaviour.So looking at correlation between indices is of limited practical use.