Super funds struggle to protect capital in bond market collapse

Christopher Joye

In The AFR I reveal a new challenge for super savers who have selected "stable" or "conservative" fund options: the bulwark of these portfolios, fixed-rate bonds, are not providing the hedge or insurance against equity market losses that many hoped with both equities and fixed-rate bonds suffering simultaneous draw-downs in October (this should not be confused with cash and floating-rate bonds, which have both delivered clearly positive returns while fixed-rate bonds have withered as a result of rising interest rates). The fixed-rate bond collapse has intensified in November with the benchmark Composite Bond Index down 1.6% in the month to date (AAA rated government bonds have lost a stunning 2% of their value in November after dropping 1.8% in October). What is fascinating is that the commonly claimed negative correlation between equities and fixed-rate bonds is actually a myth---since 1885 the correlation has been demonstrably positive during both rising and falling equity markets, as it was over the period between the 1960s and 2000, according to the actuaries Milliman. Free (VIEW LINK)


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