The correlation between stock and bond returns has been reliably and persistently negative for the last two decades across Developed Markets (DM) – matching the U.S. experience. During this regime, stocks and bonds have hedged one another, dampening overall portfolio risk for a given level of equity allocation.
Based on QMA’s 2020 2Q Capital Market Assumptions, expected returns on traditional public market investments are likely to be considerably lower over the next 10 years than in the last decade, significantly undershooting the return requirements of asset owners who need to meet liabilities. This has not been altered by the…
Measuring and interpreting the inherent risk of a portfolio is challenging. Since the Covid-driven market disruption of early 2020, investors have witnessed periods of rising equity-bond correlation and elevated volatility in the energy sector. More recently, market volatility climbed amid rising concerns about ongoing…
Forward rates contain reliable information about cross-sectional differences in expected global corporate bond returns. Many alternative bond-level and issuer-level variables, by contrast, are not reliably linked to expected bond returns or provide information about expected bond returns only through their correlation with…
We examine the risks and diversification properties of multi-asset alternative risk premia (“ARP”) strategies using a novel data set based on investable ARP products. We first show based on a natural experiment that despite differences in scope and methodology, our data is consistent with historical evidence from alternative…
For more than two decades, multi-asset class investors have relied on the inverse relationship between stock and bond prices for both portfolio diversification and downside protection in times of market turmoil. The recent surge in consumer prices, however, has triggered a temporary co-movement of stocks and bonds. Qontigo…
The correlation between equites and bonds has been particularly volatile in recent weeks as concerns about a step change in inflation and interest rates grow. Investment Insights considers the long-term correlation between equities and bonds, its drivers and the likelihood that we are entering a new and higher correlation…
Why now? Because the 40-year decline in interest rates has ended, where inflation risks and interest rates are likely to become more volatile. As a result, investors can no longer rely on bonds to provide steady returns and be the ballast in portfolios as they did for four decades. The correlation of equity and bond returns…
Using monthly versus daily returns when calculating correlations can change the perspective. Foreign stock markets and US bond markets were highly correlated to US stocks using monthly returns. Diversification benefits may have been significantly overstated using daily returns.
Natasha Brook-Walters, Co-Head of Investment Strategy, discusses downside mitigation given the shifting equity/bond correlation, the impact of cyclical and macro volatility, and opportunities to position for long-term change.
Investors may have to rethink traditional allocation strategies as the long-standing relationship between equity and fixed-income returns has been upended.
Qontigo examines the historical interaction of equity and bond-market returns over the last 60 years to identify the main triggers of shifts in their relative directions – especially situations that might prompt the two asset classes to persistently move together.
Having witnessed three of the highest monthly CPI prints in over 40 years, the Federal Reserve has acknowledged that inflation pressures may be more persistent and could require policy action longer-term.
Since the late 1990s, the negative price correlation of equity and high-grade bonds has reduced the volatility of balanced portfolios and boosted Sharpe ratios of leveraged “long-long” equity-bond strategies. However, this correlation is not structurally stable. Over the past 150 years, equity-bond correlation has changed…
Standalone equity volatility in Qontigo’s global multi-asset class model portfolio has dropped by a third since the beginning of February – yet the current predicted risk for the total portfolio of 6.6% is only marginally lower than the 7.2% of 11 weeks ago. The main reasons for this are that share and bond prices are no…
The historically low correlation between equity and government bond returns is a cornerstone of modern investment strategy and the traditional 60%/40% model portfolio, based on the theory this split provides diversification benefits that can improve risk-adjusted returns over time. For most of the past tumultuous year,…
The conventional wisdom that stocks and bonds are negatively correlated is a central component of most asset allocation strategies. But the correlation hasn’t always been negative – far from it, in fact – and there are increasing signs of strain in the relationship, prompting investors to ask: could the stock-bond…