Chart of the Week: Is the 60-40 portfolio dead?

{"text":[[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":7.25,"text":"Good morning. For decades, the 60-40 stock and bond portfolio — or something close to it — allocation model was the universal standard: capture growth with equities and offset risk with bonds. While investors more often fretted over their strategies for the “60” growth segment, the “40” leg was typically just left to plain old Treasury bonds. "}],[{"start":28.8,"text":"But since 2021, with the return of high inflation, bonds are less and less useful as a diversifier. Looking at the average risk and return across various stock/bond weightings (using annual returns for the S&P 500 and 10-year Treasury), not only has risk increased all across the board since 2021, but bond returns have been negative. In short, correlation between stocks and bonds has turned positive, meaning bonds have started contributing to equity losses, instead of offsetting them."}],[{"start":58.7,"text":"The explanation for falling bond prices is debated. The reasons range from the inflation shock, higher growth, fiscal incontinence, crowding out by hyperscaler debt, to the credibility of the Federal Reserve under Kevin Warsh. “In my conversation with clients, I’ve never in my career seen this range of diversion in opinions in terms of what’s driving Treasury yields,” said Arun Sai at Pictet Asset Management. "}],[{"start":83.4,"text":"This makes it difficult to rethink the risk-hedging component of a portfolio. “The [bond component] needs to be more actively thought of,” according to Matt Rowe at Man Group. A better way of thinking of risk diversification could come from thinking about the difference between “crisis correlation” and “non-crisis correlation” between asset classes. “There’s very different messages on different ends of the [yield] curve. There’s a lot of people who don’t think that a long Treasury position is going to save them in a risk-off.” Should the 60-40 ratio be changed, or should Treasury exposure be reconsidered altogether? Send us your thoughts: unhedged@ft.com "}],[{"start":120,"text":"Programming note: There will be no Unhedged newsletter on Monday for the UK bank holiday. We’ll be back in your inboxes on Tuesday."}],[{"start":127.65,"text":"Good reads from Unhedged:"}],[{"start":129.95000000000002,"text":"Hakyung: Looking towards the future"}],[{"start":133.25000000000003,"text":"Rob: Grief, uncertainty "}],[{"start":136.80000000000004,"text":"Daire: The etymology of ‘weird’"}],[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":146.20000000000005,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1788104238_7776.mp3"}