Search this website. You can use fund codes to locate specific funds

Weekly Credit Insight

Chart of the week: are government bonds still a useful way to hedge risk?

One of the hardest parts of investing is the challenge of continuously adjusting to ever-changing market conditions, as well as the need to unlearn certain methods that have worked for a long period of time.

In the past, central banks have found new and innovative ways to support the economy and markets, helped by the low-inflation backdrop. This has resulted in a lower-for-longer interest-rate environment and outright support for both government and corporate-credit markets.

The question now is whether the coronavirus-induced new normal will alter the oldest trick in investor playbooks: that of hedging risk with government bonds. While this worked relatively well in the first quarter of this year, rates have since stayed in a narrow range as equities and credit have rallied (see figure 1).

Figure 1. An emerging divergence: government bonds, credit and equities

Source: Bloomberg, ICE Bond Indices, as at September 2020.

Even the uptick in volatility, increase in bid-offer spreads and breakdown in the correlation between government bonds and equities in March did little to inspire confidence in Treasuries as a safe haven during material drawdowns.

Rates have also failed to materially respond to the latest equity-market sell-off (the high-yield market has held up relatively well, due to differences in its sectoral composition and its attractiveness in the reach-for-spread environment).

Only time will show whether rates will provide protection in this new environment. But at the very least, fixed-income investors must look for new ways to defend against the downside – whether this is in the form of taking a more flexible, high-conviction approach to credit, or drawing on new instruments like options to hedge against risks.  

More Insights

Authenticity in ESG integration
We explain why the delivery of Sustainable Wealth Creation has and always will be our core purpose.
Global Equity ESG: Annual Report 2020
Combining attractive fundamentals and good or improving ESG characteristics
SDG Engagement Equity: 2020 Annual Report
What engagement progress did we achieve over the last year?
SDG Engagement Equity commentary: Alliant
Alliant is on course to transform the energy mix it uses to generate electricity.
Weekly Credit Insight
Dispersion in year-to-date returns across various parts of the global credit universe.
Zen and the art of investment management
Exploring mindfulness as a vehicle for truly responsible investing