Reports of the death of bonds as a hedge against stock nightmares have been greatly exaggerated.
In the recent equity sell-off, U.S. Treasuries are back with a vengeance, and bringing with them the decisive return of a relationship investors have counted on for decades: When stocks go down, bonds tend to go up and vice-versa.
BlackRock Inc. says it’s once again a good idea to have Treasuries in a portfolio, while the likes of HSBC Private Bank, JPMorgan Asset Management and Wells Fargo Asset Management also tout fixed-income as a shelter from stormy stocks, whose volatility last month jumped to a 10-month high.
The inverse correlation between stocks and bonds has underpinned the favorite and most simple diversification strategy of fund managers across the globe -- until last year when both markets fell together in 2018, a two-decade rarity.
“We think the negative correlation is here for now,” said Brian Jacobsen, a senior investment strategist at Wells Fargo Asset Management, which oversees about $500 billion in assets. “While the relationship can change on any given day or over any given week, until we get closer to the end of the Fed’s hiking cycle, we think the relationship is one that will continue to play out.”
Different Sell-Off
Tighter monetary policy, U.S. government borrowing in over-drive and inflationary fears lifted yields last year, raising the specter of a regime shift unkind to the traditional equity-bond dynamic.
Treasuries are proving their muster once more as fundamentals crater, with the latest rout in stocks driven by fears of a global slowdown that’s prompted traders to scale back expectations for Federal Reserve interest-rate hikes, a buy signal for Treasuries.
That’s a far cry from sell-offs in the second half of last year, where interest-rate fears weighed on both stocks and bonds, according to Willem Sels, chief market strategist at HSBC Private Bank.
“The return of negative correlations is good news, as diversification was hard to achieve in 2018,” said Sels, who’s gravitating toward havens and hedges. He’s overweight gold, likes quality stocks and is sticking to shorter-term bonds that are less sensitive to changes in interest rates.
Responding to Fears
Thushka Maharaj, a global multi-asset strategist at JPMorgan Asset Management, says the late-cycle dynamic -- monetary tightening in response to inflationary pressures -- tends to challenge the vanilla bond-equity link. But it ultimately proves self-stabilizing thanks to policy redress.