Posted at 7:00 am
Why don’t bonds consistently go up when stocks go down?
What has happened since the beginning of the year – a negative return on equity investments and the bond market – has not happened in almost 50 years. It’s practically a perfect storm. We tend to view bonds as safe haven assets that offer protection from market volatility. However, this myth has been debunked since the beginning of the year.
“When building a diversified portfolio, there’s a common belief that when stocks fall, bonds will rise,” said Ruben Antoine, portfolio manager at Tulett, Matthews & Associates. So the famous 60-40 portfolio [60 % d’actions et 40 % de titres à revenu fixe] provides partial protection against a fall in inventories. It should be added that, unfortunately, this is not always the case. »
The reason ? After hitting record highs last year, markets have fallen amid Russia’s armed offensive against Ukraine, which has increased inflationary pressures and fears of a slowdown in economic activity.
At the same time, central banks have multiplied rate hikes to dampen the surge in inflation. This weighed on the bond market, whose prices fluctuate inversely to interest rate developments.
For example, if you own a bond with a 1% yield and central banks hike rates, a new bond offers 3%. My 1% bond then becomes less attractive and falls because other fixed income securities offer better yields.
Ruben Antoine, portfolio manager at Tulett, Matthews & Associates
In Canada, the central bank has raised its key interest rate four times since the beginning of the year. It is currently at 2.5% and several economists are expecting a 75 basis point rise next Wednesday, taking the target rate to 3.25%.
Since the beginning of the year, the Bloomberg US Aggregate Bond Index has fallen, as have major North American indices such as the S&P/TSX (Toronto) and the S&P 500 (New York). Several factors can affect bond prices, but if inflationary pressures had been less intense, one might have expected “more stable” or “positive” bond performance, explains Mr. Antoine.
Despite the current trend, savers have some reasons for hope. We have to go back to 1969 to see stocks and fixed income end the year in the red, Scotiabank’s Hugo Ste-Marie said in a recent statement.
“We believe that volatility will remain high in the second half of the year and capital preservation must be a priority,” adds the analyst.
While stressing that the past is not always a guarantee of the future, Mr Antoine believes there is “good news” for investors. He cites a study conducted by the American investment firm Vanguard last July. While simultaneous declines in stocks and bonds are not “uncommon,” negative returns have occurred only 15% of the time since 1976, the paper said.
“Like the phoenix, the 60/40 portfolio will go up again,” Vanguard said.
With the collaboration of Martin Vallières, The press
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