23 May 2021
What this chart shows
The chart above shows the rolling 90-day correlation of returns between global government bonds and global equities over the past five years. Whilst the correlation has historically fluctuated below zero (negative correlation, meaning when one goes up the other goes down), it has moved into significant positive territory (when one goes up/down, the other goes up/down) through 2021 and has just reached its highest level in five years. It has only briefly been higher than this in the past twenty years.
Why this chart is relevant
Government bonds have historically been viewed as the antidote to a sell-off in equities. Investors have fled to the safety of the former which helped to cushion losses when equities fell. However, as we see increasingly these days, rather than acting as the antidote to an equity sell-off, they can be the cause. Recent wobbles in equity markets have followed moves higher in bond yields (lower bond prices). The higher correlation today raises the question of whether government bonds can protect, as effectively as they have in the past, in a multi asset construct going forwards. With yields below 1% it becomes challenging.
Whilst investors have typically used government bonds as their main diversifier for years, they might benefit from diversifying their diversifiers going forward. Incorporating asset classes such as credit, convertibles, infrastructure, alternatives, and safe haven currencies, and blending value, quality and growth equity style exposures can help achieve this.
Source: Bloomberg, Momentum Global Investment Management
Research Date: May 2021
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