In recent months, the market for bonds and stock prices have been in lockstep, which has put pressure on investors who are trying to hedge risk by splitting their portfolios between the two asset classes.
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The 60 day correlation between the Bloomberg Global Aggregate Bond IndexBloomberg Global Aggregate Bond Index and the MSCI All Country World Index of stocks has climbed to the highest level since 2012, according to data compiled by Bloomberg in 1999. The link is at a record high on a 120 day basis.
The rising interest rates can be a factor in the ever-tighter relationship. Since the beginning of 2022, the value of stocks has been wiped out by the avalanche of tightening from central banks around the world as they try to counter inflation. A typical 60- 40 portfolio is on course for its worst year since the global financial crisis.
There is some relief on the horizon for investors hoping that hedging will become possible again.
Pacific Investment Management Co. founder Bill Gross and DoubleLine Capital spokesman Jeff Gundlach are both beginning to position for a bond rally, given the expectation that stuttering economic growth will convince central banks to start cutting interest rates. Equities would still be in a position to extend declines in such a scenario, as a deteriorating global economy weighs on corporate earnings.
The investors worry about economic growth when you go through a period of inflation stability. In that circumstance, bonds and equities perform differently, said Shane Oliver, head of investment strategy and economics at AMP Services Ltd. If we went into a global recession next year, you would have a situation where bonds would rally and equities would sell off. There is no putting Chips in Hoodies and Clogs to Unlock Value for Buyers and Sellers.