- When equities decline, owning true core bonds is vital.
- High yield and other credit is strongly correlated to stocks.
- Beware of bond funds reliant on credit when volatility strikes.
U.S. equities have seen steep declines in recent weeks following all-time highs, ending a period of exceptionally low market volatility with credit markets near historic low levels in yields and spreads. In such an environment, investors who have taken a disciplined approach to portfolio construction and who have treated their bond allocation as the safer part of their overall allocation – one that provides some protection when equities sell off – are likely to have fared better. They would have reduced higher yielding investments and waited for a good re-entry point to the sector.
As equity markets experience a sharp decline, a true core bond fund with low-risk exposure should have avoided such a decline. This enables an investor to preserve capital and allows for a rebalancing opportunity by selling a bond fund and then buying equities during the stock downturn.