Webinar Replay: Portfolio Implications of a Positive Stock-Bond Correlation World
What does a positive correlation between stocks and bonds mean for the future of portfolio construction?
The alignment of stars that made long-dated U.S. Treasuries more of a problem than a solution for institutional portfolios last year is unlikely to be seen again anytime soon, leaving room for those bonds to reclaim their role as a core risk-off allocation for asset owners this year, analysts say.
The events of the past week — when SVB Financial Group announced hefty losses, igniting a run on its Silicon Valley Bank affiliate that quickly drove the bank into the ground — provided a stark reminder of their defensive charms. Even as fears of financial market fragility shaved 3.4% off the S&P 500 index of large U.S. companies between March 8 and March 13, safe-haven buying of long-dated Treasuries sent yields tumbling, providing holders with an offsetting gain of more than 4%.
Others contend that negative correlations, while attractive for hedging purposes, shouldn't be seen as a be all and end all in making bonds a core holding for diversifying and hedging portfolio exposures.
"As long as stocks and bonds are not perfectly, positively correlated ... bonds can provide diversification benefits to a stock-bond portfolio," noted Bruce Phelps, Managing Director and head of Institutional Advisory and Solutions at PGIM.
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What does a positive correlation between stocks and bonds mean for the future of portfolio construction?
The long-term benefits of creating a Chief Liquidity Officer role are probably worth the effort.
Liquidity risk can be more severe than volatility risk. Funds may need a designated chief liquidity officer for integrated liquidity management.