Higher yields revive the case for a new — look 60/40 portfolio

Higher Treasury yields are reviving interest in traditional 60/40 portfolios Bond income can cushion investors against further price declines Flows favour short-term government debt and floating-rate credit products Investors are broadening bond holdings beyond Treasuries into alternative income assets By Patturaja Murugaboopathy Oct 13 (Reuters) — US investors are favourably reassessing the traditional 60% stock, 40% bond portfolio strategy as a selloff in government debt lifts yields to levels that offer more attractive income and potentially stronger future returns.

The 60:40 strategy had fallen out of favour since the 2008 financial crisis as investors increased the weight of stocks when ultra-low yields left bonds contributing little beyond asset diversification. The diversification had also become less reliable as bond prices rose alongside stocks, turning their usual reverse relationship. But the latest rise in yields has changed the calculation. With yields above 5% across parts of the US Treasury curve, investors can earn substantially more income from bonds, and many of them see that cushioning them against any further decline in bond prices.

While rising oil prices and worries about inflation and sovereign debt positions have driven bond yields from the US to Germany and Japan to multi-decade highs, many analysts also think they are close to peaking. Monty Gandhi, a New York-based interest-rates strategist at SMBC Group, said a series of supply-driven inflation shocks had hurt 60/40 portfolios, but current yields strengthen the case for allocating to fixed income assets. "At these levels, I would personally think that actually it does make more sense to buy bonds," Gandhi said. 9% before bonds become attractive enough to trigger a meaningful rotation out of equities.

5% could materially slow the US economy, limiting how much further the Federal Reserve could raise rates and strengthening the case for locking in current yields. "Those holding back right now are waiting to buy cheaper, which isn’t a wise strategy when you're so far stretched on one side," he said. Royal London Asset Management deepened its bond underweight in August and early September on concerns about inflation, but reversed course later in the month, saying it was "adding back to bonds" and taking profits on that underweight position. 24 from 2009 through 2021, Fund flows suggest investors are being selective.

5 billion from high-yield funds. "We estimate that bond funds have become underweight duration through the selloff, reaching the sort of extreme that has on average seen lower yields over the subsequent 1-to-2 quarters," Goldman Sachs wrote this week. The split points to investors favouring income strategies with lower interest-rate sensitivity or different credit exposure, rather than buying bonds across the board. Analysts said the "40" now extends beyond Treasuries and investment-grade credit to include securitized assets, municipal bonds, preferred securities and floating-rate instruments such as leveraged loans and AAA-rated collateralised loan obligations (CLOs).

Fidelity analysts said in a note that leveraged loans could fit within a broader 40% allocation, as their floating-rate coupons provide income while keeping interest-rate sensitivity low. "The debate should not be whether the 60/40 portfolio is 'dead' but whether it has evolved," they said. com;)