Why relying on 'pre-2012 correlations' for diversification is putting bond portfolios at risk

Investors cannot afford to ignore the increasingly positive correlation between core government bonds and credit markets as rate rises loom, says Jon Jonsson, senior portfolio manager, global fixed income at Neuberger Berman.

Back in 2011, as the eurozone crisis raged, European credit spreads widened and the 10-year German Bund yield plummeted by nearly 200 basis points over the summer. As risk appetite evaporated, capital rushed to perceived safe havens. Fixed income investors could be grateful that their core government bond exposures had cushioned the worst corporate bond losses, and many waited to rebalance. But then things changed. There was a brief resumption of ‘normal' negative correlation during the summer of 2012, when Greece was struggling to form a government. But then the European Central Bank pr...