For decades, the pitch was simple: hold 60% stocks for growth and 40% bonds for safety. When equities zigged, Treasuries zagged. That relationship, the bedrock of conservative portfolio theory, is cracking under the weight of persistent inflation and ballooning fiscal concerns.

The April Consumer Price Index came in hotter than expected, with prices climbing 0.6% month-over-month and 3.8% year-over-year. The result has been a punishing selloff in US Treasuries, pushing the 10-year yield to 4.59% and sending the 30-year past the psychologically significant 5% mark.

The correlation problem

The 60-day correlation between S&P 500 returns and Treasury returns has reached its highest level in more than 20 years. Stocks and bonds are increasingly moving together, which strips Treasuries of their traditional role as a hedge during equity turbulence.

Jonathan Cohn at Nomura put it bluntly.

“The value proposition of bonds in a portfolio is really quite challenged.”

What’s driving the selloff

Brent crude oil prices are approaching $109, fueled by geopolitical tensions involving Iran. Energy costs feed directly into consumer prices, creating a feedback loop that makes the Federal Reserve’s job significantly harder.

Growing concerns about US government deficits are adding what bond traders call a “term premium.” The 10-year term premium has climbed to roughly 0.86%, up from below 0.50% as recently as February.

John Luke Tyner of Aptus Capital Advisors captured the sentiment succinctly: “Bonds aren’t going to necessarily hedge your portfolio when inflation is high and volatile.”

Where investors are shifting

Money is flowing toward shorter-maturity Treasuries, where the interest rate risk is lower and the yield curve still offers reasonable compensation. When demand for long-dated Treasuries weakens, yields on those bonds must rise further to attract buyers, pushing up borrowing costs across the economy, from mortgage rates to corporate debt issuance.