The staple U.S. portfolio of 60% equities and 40% fixed income proved resilient this year, but strategists are now considering alternatives to government debt after some bond yields reached historic lows.
Sanford C. Bernstein recommends taking more risk by favoring stocks and gold, and argues the negative correlation between equities and fixed income is likely to unwind. Morgan Stanley said corporate bonds may be the best alternative to sovereign notes for curbing portfolio volatility and providing a level of income.
"I don't think bonds can provide the standard historical returns investors are used to," said Andrew Sheets, Morgan Stanley's chief of cross-asset strategy in London. "The starting yield is at a point where that type of return is just not possible. Investors are going to have to lower expectations of 60/40 portfolios, and will have to look elsewhere for what can be in the 40%."
Blending stocks and bonds, a decades-old investment staple to balance risk and reward, is being tested by ultra-low yields. Five-year Treasury yields fell to a record after the Federal Reserve last week delivered a dovish message of support for the coronavirus-stricken U.S. economy.