Treasuries
The below caught our eye. Robin (a great economist, but wrong here) makes the argument against treasuries as a safe haven device.
He invokes the Fed as the only reason for why treasuries remained negatively correlated, and hence frowns upon their premise as defensive assets.
Well, the Fed exists!
Its job is to pursue stable and smooth output, inflation, and financial market functioning (in the areas that it has domain). Treasuries are a big part of what they do.
So, why am I talking about any of this?
Well, because clients (both advisors and end-clients) do raise this issue, and in advice land all-to-often (end-clients) state a desire or preference to have zero treasuries, as a result of reading work like that of the above (the AFR loves this sort of stuff, and plenty of end-clients read the AFR).
And (you can see where this is going) the replacement ideas are to swap out the bonds with hybrids and credit, exacerbating the very issue, rather than ameliorating.
And, although it isn’t the point of the note, the negative correlation story for stocks versus bonds remain intact, and well within normal ranges.
That negative correlation means bonds still blend well with equities, even if the headline yields are almost zero. That’s because adding a positive expected return negatively correlated asset always improves the risk adjusted return of a portfolio, ex ante.
Which of course is why the 60/40 portfolio isn’t dead, yet.
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