Bonds back in favor as a hedge as inverse relationship returns

investmentnews.com:

Gregg Abella, a money manager in New Jersey, wasn’t expecting the flood of phone calls he got from clients this past week. “Suddenly people are saying to us, ‘Wow, do you think it’s a good time for us to add bonds?’”

It’s something of a vindication for Abella. He’s been, in his words, “banging the gong” for bonds — and asset diversification, more broadly — for years. This was long a decidedly out-of-favor recommendation. Until, that is, stocks started to tumble this month. Quickly, demand for the safety of debt soared, driving 10-year Treasury yields at one point early last week to the lowest levels since mid-2023.

The rally has surprised many on Wall Street. The age-old relationship between equities and bonds — wherein fixed-income offsets losses when stocks slump — had been thrown in doubt in recent years. Especially in 2022, when that correlation totally collapsed as bonds failed to provide any protection at all amid the slide in stocks. (US government debt, in fact, posted its worst losses on record that year).

But whereas the selloff back then was triggered by an inflation outbreak and the Federal Reserve’s scramble to quell it by ratcheting up interest rates, this latest equities slump has been sparked in large part by fear the economy is slipping into a recession. Expectations for rate cuts, as a result, have mounted fast, and bonds do very well in that environment.

“Finally the reason for bonds is shining through,” said Abella, whose firm — Investment Partners Asset Management — oversees about $250 million including for wealthy Americans and nonprofits.

As the S&P 500 Index lost about 6% across the first three trading days of August, the Treasury market posted gains of almost 2%. That enabled investors with 60%