How Can Stocks, Bonds Rally Together?

Market observers have undoubtedly noticed something a bit unusual these days: Both stocks and bonds have rallied together.

The Dow Jones Industrial Average has hit new highs and the S&P 500 index has set records, while U.S. Treasurys continue to push higher. Each asset class competes for investors' monies, so typically stocks rally or bonds rally, but not both together.

What gives?

Since stocks and bonds typically trade inversely, professional trader Jim Iuorio said Treasurys have advanced on fears the prolonged stock market rally could soon come to an end.

To pro trader Anthony Grisanti, it's foreign investment that's driving bond prices higher.

"My theory is it's the money that's coming in from overseas, with all the liquidity that's happening there. That money has to go somewhere," said Grisanti, founder of GRZ Energy. "If it ain't going into equities, it's going to go into bonds and I think it's coming from them."

Treasury bonds traders
Getty Images

Looking forward, though, both Iuorio and Grisanti think bond prices are likely to fall, sending Treasury yields higher. The 10-year Treasury currently yields around 1.7 percent, but if the stock market makes a big correction, both traders think the yield on the 10-year note could climb to around 2 percent by year end.

"By that time, we're going to be pretty sure on whether or not our economy can stand on its own and I think if it's showing signs that it can, without the stimulus and everything else, bond prices go lower," Grisanti said.

After all, investors generally develop more appetite for risk if economic conditions improve, so they're more likely to buy stocks instead of sticking to the low-risk bond market.

(Read More: 10 Things You Need to Know to Trade Futures)

— By CNBC's Drew Sandholm

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