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

The Meeting Room Webcast: Impact Opportunities, September 2020
Listen to the latest Federated Hermes Meeting Room: Virtual Portfolio Briefing on Impact Opportunities.
Japanese employment: engaging for greater equality
Women have long been underrepresented in the Japanese labour force.
Sharpe Thinking
As markets emerge from a heady summer, volatility has started to rear its head again
Weekly credit insight: volatility starts to normalise
Volatility in investment-grade credit has returned to the average level seen over the last decade
Credit: Industry Insights
Anna Chong, Senior Credit Analyst, presents three key takeaways on the steel sector as we move past Q2 results and into the second half of the year.
Impact Opportunities: H1 2020 Report
We examine our activity and performance in H1 2020 and explain how three megatrends are shaping our investment thinking.