Are Bonds No Longer Safe Assets?... Diverging Views Amid Stock-Bond Synchronization

Correlation Between Stocks and Bonds Turns Positive

"If Synchronization Persists, Investors Will Seek Alternative Safe Assets"

Some Still Argue High-Yield Bonds Remain a Safety Net

As stock and bond prices have begun moving in tandem, the hedging function of bonds against stocks is weakening. Some argue that, since bonds can no longer serve as a safe haven asset, alternative safe assets must be sought. However, there are still claims that bonds retain their validity as a safe asset.

Bonds Moving in the Same Direction as Stocks

According to Koscom on May 13, the monthly correlation coefficient between the U.S. S&P 500 Index returns and the returns on the U.S. 10-year Treasury futures stood at 0.38 as of February. The correlation coefficient had been negative, but turned positive in February 2022. When the correlation coefficient is negative, stock and bond prices move in opposite directions; when it is positive, stock and bond prices move in the same direction.

Since 2022, the correlation coefficient between the two returns has turned positive, causing stocks and bonds to move together. Now, when stock prices rise, bond prices also rise, and when stocks fall, bond prices also decline. This marks a departure from the past, when the two moved in opposite directions.

This phenomenon applies not only to U.S. Treasuries, but also to long-term government bonds in the UK and the Eurozone (the 20 countries using the euro). John Campbell, Professor of Economics at Harvard University, highlighted bond beta, which shows how much bond price movements are linked to the stock market. He noted, "The average bond beta was negative at -0.2 during the 2010s, but it recently shifted into positive territory. This is a phenomenon seen in the United States, the United Kingdom, and the Eurozone alike."

Bonds have traditionally been considered safe assets because their prices tend to rise when stocks, classified as risky assets, fall. From this perspective, institutional investors could control risk by including both stocks and bonds in their portfolios, as the two assets would hedge each other.

Such hedging strategies are only valid when bonds are considered safe assets. Professor Campbell stated, "If bond beta continues to be positive, bonds could also become risky assets like stocks. In this case, investors would sell both stocks and bonds during a stock market downturn and seek other safe assets such as gold or real estate."

How the Market Views Bonds' 'Safety Net' Function

The synchronization of bonds and stocks has cast doubt on the role of bonds as safe assets. Nam Seokgu, Head of Integrated Asset Division 2 at Korea Investment Corporation (KIC), said, "In the current environment of high inflation and significant geopolitical risks, bonds are less effective as safe assets. We must reconsider whether bonds can play that role in the future. At KIC, we are redefining the concept of safe assets to include gold, commodities, and hedge funds."

Son Hyup, Head of Investment Strategy at the National Pension Service (NPS) Fund Management Headquarters, explained, "When supply-driven inflation occurred in 2022, bonds failed to hedge against the decline in stock returns, causing portfolios to become skewed in one direction. Now, as oil prices continue to rise, if supply-driven inflation returns, the correlation between stocks and bonds will again become positive. We are closely examining how to allocate assets and which assets, other than bonds, can provide diversification."

There are still those who argue that bonds remain effective as safe assets. Seo Joonsik, Professor of Economics at Soongsil University, said, "Bonds with high yields of around 5% still perform well as safe assets and can protect returns when stock prices fall. While it is true that, due to Korea's long-standing low interest rates, some bonds struggle to maintain a negative correlation with stocks, investors can still prepare for stock market declines by diversifying into various bonds such as U.S. and Brazilian bonds."

Lee Jaehyung, a researcher at Yuanta Securities, commented, "The current trend of stock and bond prices moving in the same direction may be temporary. This synchronization appears to be a special pattern caused by inflationary factors such as rising oil prices." He added, "If, as in the past, stocks plunge due to credit events or a liquidity shock, the preference for safe assets will intensify, and capital could flow back into bonds, causing bond prices to surge once again."

This content was produced with the assistance of AI translation services.