By Jeremy Gaunt, European Investment Correspondent
LONDON, March 3 (Reuters) - Could it be that bond investors are trying to say something to the overall market?
Global stocks as measured by MSCI were adding more losses on Tuesday to the nearly 5 percent they racked up a day earlier.
But government bond prices were also falling. In other words, not only was there no rush to safe havens, investors were actually selling bonds.
Even after Wall Street lifted the global stock picture a bit, euro zone government bond prices were flat to lower despite the broad DJ STOXX euro zone equity index hitting its lowest level since late 1996.
"What has certainly happened of late is that equity weakness has given ever less impetus on the upside for the bond market, said fixed income strategist Marc Ostwald at Monument Securities.
At one level, what is happening is that both government bonds and equities, whose prices are usually in inverse correlation to each other in times of volatility, are facing similar problems.
Ostwald notes, for example, that when financial companies such as Citigroup and American International Group wobble as they have over the past few days, equity investors lose confidence and worry about a government take over.
Government bond investors, however, also get spooked -- this time by the prospect of governments having to fund their interventions by borrowing and increasing supply.
BREAK DOWN
There is some evidence that the correlation between stock and bond movements is breaking down or, at least, that the degree of linkage is weakening.
Throughout last year, for example, the MSCI index lost 43.5 percent. An equivalent bond index compiled by Citi gained 8.9 percent. Citi's composite world government bond yield, meanwhile, lost 120 basis points over the year.
In other words, falling stocks begat pricier bonds.
In February this year, however, while the world stock index fell 10 percent, the Citi bond yield gained 2 basis points and its bond index gained only 0.3 percent, including coupon payments.
The latest flow data from fund tracker EPFR Global shows a similar pattern, with investors pulling money out of equity funds and most bond funds in its latest weekly report. U.S. bond funds were an exception.
On markets themselves, bond prices have fallen so far this year for both long- and short-term U.S. government debt and for long-term euro zone debt.
Money is flowing into money markets or very short term bonds instead.
But while this may well be the result of bonds and equity investors suddenly facing the same headwinds -- essentially bad news now sinking all ships -- there is also the possibility that it reflects a coming sea change in which bonds keep selling off and stocks recover.
A number of leading fund strategists have said lately that the huge losses on global stock markets now present an opportunity. Bob Doll, chief investment officer for global equities at BlackRock talks of the possibility of a "near-term and significant rally".
Conversely, government bond yields are low, supply soon to be abundant and huge amounts of money are being turned towards boosting world economic growth.
"Last year it was all about plain vanilla government bond exposure," said Mohamed El-Erian, chief executive officer of bond giant PIMCO.
"People were willing to drive Treasury yields negative. But the whole government response means massive government bond issuance. That's why we are cautious on longer-dated Treasury bonds," he said. (Additional reporting by Natsuko Waki; Editing by Ron Askew)
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