Bonds to Stage Comeback as Hedge for Stock Losses, Investors Say

After the biggest loss for 60/40 portfolios since the global financial crisis, better days may lie ahead for the trillion-dollar complex of balanced investment strategies.

Amid optimism that inflation has peaked, more than 60% of 610 respondents to the latest MLIV Pulse survey are betting stocks and bonds will move in opposite directions this year — re-establishing a time-honored relationship that has powered pension and endowment funds over the past two decades.

If they’re right, it would mark a big shift from the last year when equities and debt plunged in concert on runaway price growth. Big in-tandem market losses have sparked existential angst about the future of the investing style that drives 60% of assets into shares and 40% into bonds — while fueling a Wall Street hunt for alternative hedges.

Now survey participants are getting modestly bullish on bonds. The 10-year yield is seen dipping to 3.5% by the end of 2023, down from last year’s high of 4.24%.

Another big MLIV Pulse call: 2023 will see an uptick in moderate risk-taking with the S&P 500 eking out a gain of about 4%. The projections are in line with the similarly restrained prediction among market strategists as an economic downturn threatens to undercut corporate earnings in the months ahead.

“The next operation for the Fed, once they are done, is going to be cuts,” said John Madziyire, senior portfolio manager and head of US Treasuries at Vanguard Group Inc. “Before we actually get to it, bonds will front-run that. That means bonds do become a diversifier again.”