Graham - In Search of Negative Beta - July 2020
A brief paper written by Graham Capital Management in July 2020, evaluates how bonds have historically provided protection during equity selloffs and how likely they are to do so in the future.
- Due to low interest rates, the potential for sizeable returns when holding bonds is drastically limited from the outset.
- High positive yield bonds tend to not provide any protection, instead displaying mostly, and sometimes highly, positive beta and essentially becoming a risky asset themselves.
- While in the past bonds have indeed provided positive returns during equity market declines, it is far from certain that they will continue doing so in the current market regime.
This shows that with bonds currently trading in a very low yield regime, it is unlikely they will offer much if any downside protection, or worse they could move in sync with equities in the next selloff, exacerbating any portfolio losses. Investors may therefore wish to consider alternative protection approaches.