I have come across interesting charts that show the changing correlation between stock returns and government bond yields.
My gut instinct tells me that such relationship would be expected to be negative (bond yields go up, less demand for stocks, stock returns decrease as people are no longer adequately compensated for risk and move to bonds).
However, I believe that simply stating this is not enough reasoning. I was wondering: what established theories can show that stock returns and bond yields are meaningfully connected rather than it being just a correlation in numbers and are a bit more complex than just stating that these are competing asset classes.
I assume that there must be some theory behind it as we can see the correlation move from positive to negative and vice versa but am only aware of simplistic theories that state that it should stay strictly negative. Looking for a starting point in my research.