Managing Duration in Multi-Asset Strategies? Be Dynamic

17 February 2022

2 min read

Government Bonds Have Been Much More Volatile than Normal

90-Day Trailing Volatility (Percent)

Line chart comparing government bond and high yield volatility to historical averages.

Historical analysis does not guarantee future results.
Data through January 31, 2022
US High Yield is represented by the Bloomberg US Corporate High Yield Total Return Index Unhedged USD. US Treasury is represented by the Bloomberg US Treasury Total Return Unhedged USD. Volatility is represented by standard deviation, calculated using daily returns over trailing 90-day periods. Historical volatility represents the 10-year average through January 31, 2022.
Source: Bloomberg and AllianceBernstein (AB)

For most of the past decade, government bonds have contributed positive returns and a note of stability to multi-asset portfolios. But since late 2021, they’ve been much more volatile, as markets digest central banks’ transitions toward tighter monetary policy.

The volatility of US Treasuries, for example, has been well above normal—and actually above that of high-yield bonds. For investors, this scenario calls for a dynamic approach to managing interest-rate risk, as measured by duration. When government bonds are unsettled, as they were for much of 2021 and into 2022, it made sense to lean away from duration to manage overall portfolio volatility.

While we could see further rate volatility, markets are now pricing in a series of US rate hikes, reducing the downside risk for Treasuries. It’s possible that volatility in government bonds begins to return toward normal, helping to reinvigorate the role of these investments as a source of diversification.

Meanwhile, we think volatility in credit markets is likely to rise but remain below average, given the strong fundamentals underpinning corporate issuers as well as low default rates. In our view, this makes credit an attractive source of yield in today’s environment, and an area worth considering for additional exposure in multi-asset portfolios.

The bottom line: in multi-asset investing, portfolio allocations can’t stand still when navigating an eventful period ahead.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

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