Since 2008 there has been a succession of ‘risk-on, risk-off’ (RoRo) periods: when risk is ‘on’, bond investors have seen fit to buy emerging markets and high-yield corporates; when risk is ‘off’, they have run for the proverbial hills with their pockets full of government bonds.
In ‘normal’ markets, government bonds and risk assets are negatively correlated, making them happy bedfellows in a portfolio.
During periods that central bank action (or investor expectations of action) was the dominant factor, correlations are much lower, so owning government bonds or risk assets wouldn’t always have compensated investors for losses in the other.
The latest period is the most extreme: since the UK’s EU referendum, prices of bonds and equities have been moving in the same direction – a positive correlation.
It seems that RoRo has been replaced by QEoQEo (or ‘quantitative easing on, quantitative easing off’) as the new way for markets to behave, with investors fixated upon the monetary easing activities of central bankers.
For a longer article on this topic, head to Newton’s blog.
Jon Day – Newton, a BNY Mellon company