Stock’s Safety Net Disappearing?

Don’t look now, bond investors, but there may be a bit of a sea change happening in how bonds react to falling stock prices (or perhaps, more correctly – how stocks react to falling bond prices). Most investors have been taught that bonds are conservative, and that you want bonds in your portfolio as a diversifier which should provide a hedge to your stock holdings in a down market.

This has generally held true over the years, as can be seen in the following chart via Charles Schwab via SeekingAlpha:

(Disclaimer: past performance is not necessarily indicative of future results.)

But the last 5 weeks  has seen a dramatic difference in this long held market axiom that bonds should go up when stocks go down, with the S&P 500 and US 10  Yr Note futures down an almost identical -4.2% and -4.3% month to date in June. What’s more, the big down days (last Wed, Thurs., Fri) all saw bonds down big as well.

Chart Courtesy: Finviz.com

(Disclaimer: past performance is not necessarily indicative of future results.)

How rare is this in the current environment?  Well, the current 5 day rolling correlation of .974 is the highest when looking at moves over 1% up or down since July of 2011, and significantly higher than the average 5 day rolling correlation of -0.63 over the past 2 years (and -0.62 during the past 12 months). We plotted the rolling 5 day rolling correlation between the cash prices of the S&P 500 and 30 Year US Govt. Bonds over the past 2.5 years to get a better look:

(Disclaimer: past performance is not necessarily indicative of future results.)

You can see the spike up in correlation, but the question is what happens to the world (and to a lesser extent managed futures performance) if this chart flips and the average correlation between stocks and bonds is more like positive 0.5 over the next 2.5 years. That would surely cause some havoc in the portfolios of investors who rely on bonds for diversification and expect them to be a flight to safety in times of a market crisis. The thing is – if the rise in interest rates causes the market crisis – then what?

That’s exactly what the Boston Globe warned their readers of a couple months ago.

“That may mean troubling times ahead for investors who have come to rely on bonds as a reliable place to hide from the risks of the stock market. If bond portfolios get hit hard, that could mark a third major setback for investors since 2001, following two dramatic stock market plunges. A serious bond market decline would not take place all at once, like a bad session in the stock market. But bond investors could face a slow, steady bleed for years, with annual losses of about 1 to 2 percent.”

How managed futures perform in a rising interest rate environment is yet to be seen, but we like our chances being able to go short interest rate futures (rates up), even though there are likely to be headwinds in terms of negative roll yield (we’ll have more on that in an upcoming newsletter…stay tuned)

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.