Bonds aren’t quite the hedge against equity losses that they used to be, and that could have more and more investors looking for answers in the foreign-exchange market.
With interest rates around the world near zero, it’s become much cheaper to bet against various currencies that are typically tied to the global growth outlook, such as the Australian dollar and the Norwegian krone. While many of these once had a significant rate premium over the likes of the U.S. dollar, that has shrunk drastically.
Investors shorting these currencies now give up very little in terms of interest-rate differentials, or carry, even as their link to cyclical growth outcomes appears to remain intact. At the same time, government bonds have been relatively range-bound, blunting their ability to act as a shock absorber for equity losses and potentially imperiling the classic 60/40 portfolio.
“As government bond yields approach zero, their sensitivity to volatility events declines, reducing their efficacy as a hedge,” JPMorgan Chase & Co. strategist Meera Chandan wrote in a report Tuesday. “FX could thus see increased involvement from proxy-hedgers.”
– BloombergQuint