When bonds go bad at times of crisis - and what to do about it

Structural risk management important

The prospects for traditional developed market government bonds look bleak. Low starting yields mean potential returns are low, and even in the case of an economic shock, there is limited space for government bond yields to fall further.

In 2020, in the face of the worst economic recession in centuries, the European Central Bank could not cut rates, and gilt yields only fell 0.6%. The efficacy of bonds as a safe haven asset class in risk-off periods has, in our view, been heavily compromised. Furthermore, in recent months we have seen an increasingly worrying picture of gilt bond yields rising on days when equities are falling, rather than the other way round. Holding duration in portfolios has not helped when you need it most. Lower expected returns extend to credit and equities too, although in the case of equities,...