US Treasuries, German Bunds Still Anchor to Windward

With central banks anchoring official rates at historic lows, investors are understandably concerned that government bonds won’t act as an offset to equity risk the way they have in the past. But recent history suggests that low—and even negative—yields don’t eliminate the buffer that’s provided by government bonds.

In fact, amid the dramatic sell-off in risk assets earlier this year as the global pandemic took hold, and again in September when equity markets pulled back, government bonds served as one of the few true offsets to equity market volatility.

For example, throughout 2020, the correlation between US Treasuries and the S&P 500 (Display, left) has remained below –0.4 on down days for the stock market.

And in Europe, yields on 10-year German Bunds were well into negative territory when stock markets fell in March and September. But correlations between Bunds and the MSCI Europe (Display, right) became even more negative during those sell-offs, falling to around –0.5.

In other words, government bonds became more defensive when defensiveness was needed most. That argues for hanging on to your government bond allocation, which provides an essential buffer during periods of heightened volatility and sell-offs in the risk markets.