Bonds have been down all year, but the omicron fallout is a reminder that they are anything but out.
With the S&P 500 posting its biggest slide Friday since February on spread of the new strain, Treasuries rallied big time on haven buying and cushioned the selloff in global risk markets.
The move pushes back against the loud anti-bond brigade on Wall Street, which argues the asset class is a portfolio diversifier no more, citing in-tandem moves with stocks at various points of the pandemic risk cycle.
"It reveals that Treasuries still provide very good cross asset hedging," Michael Purves, founder of Tallbacken Capital Advisors, wrote in a note. "When there is a macro shock, the bid can be ferocious – strong inflation not withstanding."
Treasuries were on the backfoot in Monday trading amid the the revival in risk assets, with the yield on the 10-year benchmark retracing about half its Friday move.
Beyond the one-day bounce, there are bigger reasons why bonds — and balanced-portfolio strategies that rely on them — aren't broken in the age of inflation.
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In a recent study, Ardea Investment Management researcher Laura Ryan stress-tested investment strategies across economic regimes. Her data confirms that over the decades, balanced portfolios allocating 40% to fixed income and 60% to shares really do enjoy lower portfolio volatility than those loaded with risk assets — thereby helping risk-adjusted returns.
"The consensus now seems to be that government bonds are not doing their job," she said in a telephone interview from Sydney, where her research helps inform strategies at the specialist fixed-income manager that targets low-volatility returns. "That argument fails to consider the relative importance of bonds in reducing overall portfolio volatility."
