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Portfolio Chart: Tapping on bonds for diversification
Aug 2023 (2-minute read)
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Source: Bloomberg, J.P. Morgan Asset Management. Data as of 18.08.2023. Rolling six month pairwise correlations between weekly price returns of equity indices (S&P 500 and MSCI All Country World Index price indices) and bond indices (Bloomberg Global Treasury Index and Bloomberg US Treasury Index). Indices do not include fees or operating expenses and are not available for actual investment. Past performance is not a reliable indicator of current and future results. This information is provided for illustrative purposes only to demonstrate general market trends. Information shown is based upon market conditions at the time of the analysis and is subject to change. Not to be construed as an offer, research or investment recommendation.
In 2022, to the frustration of multi-asset investors, bonds – specifically duration1 – failed to provide ballast to portfolios. As illustrated above, stock-bond correlations rose on the back of high inflation and rapidly rising interest rates. Both equities and fixed income posted major losses, with bonds recording one of the worst returns on record for the asset class.
Following the reset in fixed income markets, stock-bond correlations have normalised, having declined meaningfully after peaking earlier this year. This means equities and government bonds are likely to move in different directions, with high quality fixed income once again presenting diversification opportunities for portfolios.
Doing what it says on the label
Significantly higher yields and normalising correlations have restored the diversification properties that had made high quality fixed income a helpful tool in managing downside risks in portfolios. Once again, they present a useful counterbalance to other risky assets amid signs of a cyclical slowdown.
Moreover, as illustrated above, stock-bond correlations are not static and can quickly shift according to changing economic and market conditions. This underscores the importance of an active approach that adjusts bond exposure in response to changing correlations to help investors better navigate an uncertain macro environment.
Provided for information only based on market conditions as of date of publication, not to be construed as offer, investment recommendation or advice. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations, may or may not come to pass. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.
Diversification does not guarantee investment return and does not eliminate the risk of loss. 1. Duration is a measure of the sensitivity of the price (the value of the principal) of a fixed income investment to a change in interest rates and is expressed as number of years.
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