A precipitous slide in Treasury yields is calling into question one of the world’s most popular investment strategies.

The traditional asset mix of 60% stocks and 40% bonds, a starting point for investors since the proliferation of modern portfolio theory in the 1950s, has produced one of the best risk-adjusted returns of the past three decades, outshining debt alone. But with Treasury yields now hovering around zero, and likely to stay there for years, those gains are in doubt.

It’s not the first time that so-called 60/40 portfolios have faced scrutiny; the strategy is often a target of griping after a surge in stocks leaves investors short-changed. Still, this blend has protected many from this year’s volatility, eking out a 2.5% return, according to JPMorgan Chase & Co.’s Jan Loeys. But with yields in the world’s biggest debt market plumbing new depths, bonds have less room to rise going forward, hitting their use as a hedge against falling stock prices. That has money managers looking beyond Treasuries to securities that have more potential to rally.

“There’s a strong temptation to reach for yield wherever people can find it,” said Bill Merz, head of fixed-income research at U.S. Bank Wealth Management, which oversees $180 billion from Minneapolis. “On a global scale, more investors are migrating out the risk spectrum because they feel they have no choice.”

Calls for the demise of the 60/40 portfolio resurfaced in August, as U.S.-China trade tensions exacerbated fears of a global economic slowdown. Bank of America Corp. and Morgan Stanley warned of sobering returns late last year, but expectations that the Fed will eventually cap yields for some Treasury maturities have given these arguments further traction.

The mix, as measured by the S&P 500 Index and Bloomberg Barclays U.S. Aggregate Bond Index, produced an annual compounded rate of return of almost 10% from 1983 to 2019, JPMorgan’s Loeys, a senior adviser of long-term investment strategy, wrote in a note June 30. Going forward, he sees returns on the 60/40 portfolio dropping to around 3.5% per year over the next decade, but investors could boost their returns to a little over 4% by adopting a portfolio that’s 40% stocks, 20% bonds and 40% invested in securities with some characteristics of both, he wrote.

That could include collateralized loan obligations, commercial mortgage-backed securities, real estate investment trusts or utility stocks.

Investors seem to be on the same page. Conning -- an investment manager that oversees $120 billion from Hartford, Connecticut -- has looked more closely at structured products such as CLOs over the past three months because it’s an area where prices haven’t been pushed higher by the Federal Reserve’s emergency asset purchases, Chief Investment Strategist Rich Sega said. And U.S. Bank Wealth Management increased allocations to investment-grade corporates and municipal credit in June, Merz said.

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