Industry Voice: Is the bond broken?

clock • 2 min read
Industry Voice: Is the bond broken?

An allocation to government bonds within a multi-asset portfolio has traditionally played a vital role in terms of risk management and diversification. However, the decadelong bull era in both government bonds and equities has led investors to ask whether this assumption is still valid. Additionally, near-zero yields across the globe bring into question the cost associated with this diversification benefit.

Bonds are usually included within a strategic asset allocation (SAA) of a multi-asset portfolio for two main reasons:

  • Income: They provide a stable source of income in terms of coupon payments, along with a capital cushion in a rising yield environment. For investors with explicit liabilities, this income stream gives bonds an important risk management role. In this paper our focus is on the role of bonds in the return portfolio rather than the liability-hedging portfolio.
  • Diversification: In times of crisis, government bonds benefit from the flight-to-quality trade, partly driven by an expectation that central banks will stimulate growth by cutting rates.

The diversification benefit has been brought into question recently and we will analyse the validity of this hypothesis. Also in this paper, we analyse how government bonds interact with other asset classes in a multi-asset portfolio and discuss the investor characteristics which allow us to perform a cost-benefit analysis for including fixed income allocations within our strategic asset allocation.

 

 

 

Important information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

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