Flight to Safety Pattern Starting to Shift

In the wake of bank failures earlier in the month, stock prices and bond yields had been highly correlated.  This is a more normal trading pattern for times when the market is trading "risk" as opposed to "Fed accommodation."  This week has marked the biggest departure from that risk-on/off pattern--especially over the past two trading sessions.  This suggests markets are increasingly getting over bank contagion fears, but without rushing out of the bond market.

What do we make of this?  Not too much, necessarily.  Once could argue, the risk-on/off pattern is still more intact than not by pointing out that stocks moved up late last week and bonds finally got caught up this week.  After all, both are right in line with the same levels from Wednesday morning.

But it's also clearly not as intact as it had been last week.  This could be viewed as a transitional phase with the market gradually getting back to trading Fed accommodation (i.e. lower inflation = good for both stocks and bonds because it implies a friendlier Fed, or higher inflation doing the opposite).  Either way, it's encouraging to see bonds holding ground without rushing back up to the levels seen before the SVB failure.  This strongly suggests the market is assuming some economic fallout from the banking drama.  

In other words, the conditions that justified 4% 10yr yields have changed, probably.  And that belief would only be eroded by a series of compellingly strong economic reports.