Posted at 7:00 a.m.
Why don’t bonds go up consistently when stocks go down?
Jacquelin Bois
What has happened since the beginning of the year — a negative return on equity investments and in the bond market — has not been seen in almost 50 years. It’s practically a perfect storm. We tend to think of bonds as safe investments that offer protection against market volatility. However, this myth has been debunked since the beginning of the year.
“There is a popular belief when building a diversified portfolio that when stocks go down, bonds will go up,” says Ruben Antoine, portfolio manager at Tulett, Matthews & Associates. So the famous 60-40 portfolio [60 % d’actions et 40 % de titres à revenu fixe] partially protects against a decline in stocks. It should be added that unfortunately this is not always the case. »
The reason ? After reaching record highs last year, markets have fallen in the wake of Russia’s armed offensive against Ukraine, which has intensified inflationary pressures and fears of an economic slowdown.
At the same time, central banks have multiplied interest rate hikes in an attempt to quell the surge in inflation. This had the effect of weighing down the bond market, whose prices fluctuate inversely to the evolution of interest rates.
PHOTO MARCO CAMPANOZZI, PRESS ARCHIVES
Ruben Antoine, Portfolio Manager at Tulett, Matthews & Associates
For example, if you own a bond that offers a yield of 1% and the central banks raise rates, a new bond will offer 3%. My 1% bond then becomes less attractive and will drop because other fixed income securities offer better returns.
Ruben Antoine, Portfolio Manager at Tulett, Matthews & Associates
In Canada, the central bank has raised its key rate four times since the start of the year. It is currently 2.5% and several economists are anticipating a 75 basis point increase next Wednesday, which would take the target rate to 3.25%.
Since the beginning of the year, the Bloomberg US Aggregate Bond Index has fallen, like the major North American indices such as the S&P/TSX (Toronto) and the S&P 500 (New York). Several factors can influence the price of bonds, but if inflationary pressures had been less intense, it would have been possible to expect “more stable” or “positive” performance from bonds, explains Mr. Antoine.
Despite the current trend, savers have a few reasons for hope. We have to go back to 1969 to see stocks and fixed income end the year in the red, underlines Hugo Ste-Marie, of Scotiabank, in a recent note.
“We believe that volatility will remain high in the second half of the year and that the preservation of capital must be a priority”, adds the analyst.
While taking care to specify that the past is not always a guarantee of the future, Mr. Antoine considers that there is nevertheless “good news” for investors. He cites a study by the American investment firm Vanguard carried out last July. While simultaneous declines in stocks and bonds are not “unusual,” negative returns have only been seen 15% of the time since 1976, the paper points out.
“Like the phoenix, the 60/40 portfolio will rise again,” Vanguard said.
With the collaboration of Martin Vallières, The Press
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