Go Longer, Be Safer
Author: David Stonehouse
March 10, 2020
A number of asset classes, industry sectors and investment structures have historically helped investors play defense in periods of extreme market volatility, but investors shouldn’t forget the long end of the government bond curve, a very effective safe haven when stocks turn ugly.
In fact, long-term U.S. Treasuries have provided positive returns in all but three instances where equity corrections of greater than 10% have occurred since 1996, including the current pullback induced by fears of the coronavirus spreading and becoming a more severe economic headwind.
This combination of a strong inverse correlation to equities coupled with a solid return profile during times of duress has made long government bonds an ideal complement to stocks in a well-diversified portfolio.
Stock Market Corrections vs. Long Bond Performance
Government bonds with shorter maturities have also performed well during these periods, but not to the same extent as the 30-year version, which is far more sensitive to changes in interest rates and has returned more than 20% year-to-date, according to Bloomberg data.
For instance, a drop of 50 basis points in yields would result in roughly an 8% gain for 30-year Treasuries, as opposed to a 4% gain for 10-year issues, and a 1% gain for two-year issues.
This isn’t to say that investors should load up aggressively on long bonds when stocks correct and yields fall like they have in recent weeks. After all, the math works just the same in reverse when share prices eventually rebound from a fall and/or yields start to climb again.
But it does demonstrate the importance of ensuring government bonds with longer maturities are given a strategic allocation alongside other defensive options such as gold, real estate, staples, utilities, the U.S. dollar, or even cash in a broadly diversified portfolio. While these options have their merits, none has delivered as consistent and strong a return profile during adverse market conditions as long bonds.
At the same time, it’s equally important in today’s low-yield environment to pair exposure to government bonds with higher-yielding bonds such as high-yield and investment grade credit, as well as emerging market debt and convertible debentures.
In doing so, investors will be better positioned to weather the kind of market volatility we’re experiencing today while taking advantage of the opportunities that are bound to arise from it over time.
David Stonehouse, Senior Vice-President and Head of North American and Specialty Investments, AGF Investments Inc.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2020 AGF Management Limited. All rights reserved.
Written by
David Stonehouse, MBA, CFA®
Senior Vice-President and Head of North American and Specialty Investments
AGF Investments Inc.
