A piece in today’s FT refers to investors suffering the 60/40 blues. It comments that the expected diversification benefit of adding a large chunk of fixed income securities to an equity portfolio just did not work in September and 60/40 porfolio investors suffered from both an equity sell off and rapidly rising gilt yields.
There is more of that today as the market focuses on rising energy prices. It would be a surprise, but not improbable, if the much anticipated end of cycle market sell off was driven by oil and gas prices. People of my age were used to talking about the energy crisis constantly in that late 70s (I had my moped fuel ration book in 1973/4) and we note the re-emergence of those two little words in media coverage.
As I have pointed out before, an increase in bond yields of 1% is not too dramatic if the rise is from 10%, but a rise from 0.5% to 2% is very dramatic for longer maturities. We are now witnessing the process live.
I have been writing for quite a while that owning a general mix of fixed income securities was not necessarily going to be useful in the next part of the global economic cycle. Some bond fund managers (tactical or speciality funds come to mind) may well still be able to offer some volatility control and even make a little money, but index trackers heavy on long dated gilts and US treasuries are going see their performance hammered.
