Bonds once again have a license to hedge
TLT•Global bonds rallied as investors bought Treasuries during a selloff in AI-related shares, with 10-year U.S. yields falling toward 5% from 5.3% the prior week. The move suggests bonds may again cushion stock-market declines, despite expectations that central banks will raise rates further.
1. Bonds rally during selloff
Investors bought U.S. Treasuries as technology shares sold off on concerns about the economics of AI infrastructure spending. Ten-year Treasury yields edged down toward 5%, from 5.3% the prior week, and government bonds also rose in Germany and the United Kingdom.
2. Hedge relationship returns
The bond rally revived the inverse relationship between stocks and fixed income that underpins the 60-40 portfolio, after bonds and equities had moved together during energy shocks. The correlation between the two hovered around 60% in late September as Brent crude topped $100, but the article says the relationship flipped this month.
3. Rate expectations diverge
September inflation in the United States and euro zone was hotter than economists expected, and derivatives suggest the Federal Reserve, European Central Bank and Bank of England could each raise rates three more times over the next year. The article says many investors doubt rates will rise above 4.5%, while 5% bond yields could leave room for prices to appreciate if a shock such as an AI bust hits economic activity.
