“Fixed Income’s role in a multi-asset portfolio – still a diversifier?”
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Market Mood
Heightened geopolitical risks from the conflict in Iran and disruptions to oil supplies have renewed focus on the defensive role of fixed income within balanced and multi asset portfolios. In earlier periods, bonds failed to protect against equity declines due to sharp rate hikes, but conditions now differ: inflation had been moderating before hostilities, and interest rates began from a higher base.
The central issue for investors is the balance between yield and duration risk. Longer dated treasuries provide higher returns but are more vulnerable to rising rates, while shorter dated treasuries offer flexibility and lower sensitivity. Although inflation pressures had eased, the conflict raises the risk of renewed increases, limiting the Federal Reserve’s ability to cut rates further despite weaker employment data.
Preference remains for shorter dated treasuries, which deliver attractive yields without excessive exposure to duration risk. Bonds continue to serve as a useful tool for capital protection during volatility, but staying invested is critical, as equity markets have historically shown resilience in the year following the onset of major conflicts.
The ability of both balanced and multi asset portfolios to allocate to bonds remains a helpful tool to protect capital in moments of volatility.