(Bloomberg) -- Australian bonds appear to be powering the recent surge in domestic stocks, with the two assets moving more in tandem on optimism the Reserve Bank will cut interest rates.

The country’s benchmark S&P/ASX 200 Index soared to a record high and bond yields fell back from multi-year peaks on Wednesday after soft inflation data bolstered bets the RBA is done tightening policy. The equity milestone comes as the correlation between local stocks and 10-year yields is about the strongest since the 1990s, according to Bloomberg-compiled data.

“The recent run-up in stock prices has not been driven by either earnings upgrades or better macro data,” UBS AG analyst Richard Schellbach wrote in a note dated Jan. 30. “Instead it has been almost entirely driven by the strong rally in bond yields.”

Read: Australian Stocks Rally to Record High as Inflation Cools

The country’s bonds have rallied alongside global peers since the start of November as traders wagered that the RBA’s interest-rate hike that month would be its last for this cycle. Meanwhile, local shares so far this year have been outperforming a regional gauge of stocks, which has been weighed by a selloff in Chinese equities.

Still, the relationship between shares and bonds has potential to weaken. Australia’s equity benchmark retreated Thursday after the Federal Reserve pushed back on rate-cut speculation, while local bonds advanced as traders fully priced in an RBA reduction in June.

Further gains for bonds may also require signs the economy is tipping toward a recession, which could spur a divergence between moves for debt and equities. 

In addition, a flurry of earnings due this month will test whether current stock prices are warranted. The benchmark is trading near its highest valuation since early 2022, according to data compiled by Bloomberg.

With Australian share prices having “run up so hard over the last few months, considerable pressure is now on earnings in February to justify valuations,” Schellbach wrote. 

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