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How Can Treasuries Help Diversify Your Portfolio?

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KATHY JONES:  Most investors understand the importance of having an allocation to fixed income in their portfolios for generating income, capital preservation, and diversification, but when it comes to diversification from stocks, not all bonds are created equal.

I’m Kathy Jones, and this is Bond Market Today.

There are many types of bonds, but not all provide diversification from stocks. In fact, many types of fixed income investments are positively correlated with stocks which means they tend to move together with the stock market. These would include high-yield bonds and emerging market bonds, and preferred securities.

For diversification from stocks, one of the best options can be treasuries, particularly intermediate-term, or even long-term treasuries. They tend to appreciate in value when the stock market goes down, and that can be really important in reducing volatility in an overall portfolio. It’s also helpful when you go to rebalance your portfolio, if your stocks have gone down in value and your bonds have gone up in value, you can reinvest in stocks at better prices.

Shorter-term treasuries tend to hold their value during times of market turmoil, but because of their very low durations, they don’t tend to appreciate as much in value as intermediate or long-term treasury bonds. We looked back at market performance during time periods when the stock market went down 20% or more going all the way back to 1932, and compared the performance of short-term treasury bills with intermediate-term treasury bonds during those time periods in the subsequent 12 months, and what we found is that, with the exception of the very high-inflation era of the 1970s, the intermediate-term treasury bonds significantly out-performed the treasury bills, and that’s really important when you’re thinking about reducing the overall volatility in your portfolio.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Diversification and rebalancing a portfolio cannot assure a profit or protect against a loss in any given market environment. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Investing involves risk including loss of principal.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

Index Definitions

S&P 500: a market capitalization-weighted index of 500 of the most widely-held U.S. companies in the industrial, transportation, utility, and financial sectors.

Ibbotson U.S. 30-day Treasury Bill Index is compiled from The Wall Street Journal prices for 1977 to the present and the CRSP U.S. Government Bond File from 1926 to 1976

Ibbotson U.S. Intermediate-Term Government Index A fund with at least 90% of its bond portfolio invested in government issues with a duration of greater than or equal to 3.5 years and less than six years or an average effective maturity of greater than or equal to four years and less than 10 years.

The ICE BofA Merrill Lynch Fixed Rate Preferred Securities Fixed Rate Index tracks the performance of fixed-rate USD-denominated preferred securities issued in the U.S. domestic market.

Bloomberg Barclays U.S. Long Treasury Bond Index includes all public obligations of the U.S. Treasury, excluding foreign-targeted issues with maturities of 10 years or longer.

The Bloomberg Barclays U.S. Municipal Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed tax exempt bond market. The index includes state and local general obligation, revenue, insured and pre-refunded bonds.

The Bloomberg Barclays U.S. Aggregate Bond Index is a market-value-weighted index of taxable investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage backed securities, with maturities of one year or more. The 1-3 year, 5-7 year, and 10+ year indexes are all components of the broad U.S. Aggregate Bond Index.

The Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index is a market value-weighted index that tracks inflation-protected securities issued by the U.S. Treasury. To prevent the erosion of purchasing power, TIPS are indexed to the non-seasonally adjusted Consumer Price Index for All Urban Consumers, or the CPI-U (CPI).

The Bloomberg Barclays Corporate Bond Index covers the U.S. dollar (USD)-denominated investment-grade, fixed-rate, taxable corporate bond market. Securities are included if rated investment-grade (Baa3/BBB-/BBB-) or higher using the middle rating of Moody’s, S&P and Fitch ratings services.

The Bloomberg Barclays Emerging Markets USD Aggregate Bond Index includes USD-denominated debt from emerging markets in the following regions: Americas, Europe, Middle East, Africa, and Asia.

Bloomberg Barclays U.S. Corporate High-Yield Bond Index covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below.

Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

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