A selloff in government bonds is testing one of the most basic assumptions in markets: that Treasuries and other high-quality debt will cushion portfolios when stocks fall.
Long-dated bonds have come under pressure since the Iran war started, as investors demand more compensation for inflation, U.S. economic strength and expected increases in bond supply driven by deficit spending.
The 30-year U.S. Treasury yield rose further above 5% than analysts expected this month before drawing buyers. The 60-day correlation between the S&P 500 and Treasury returns is now the highest in over two decades, meaning bonds are tending to amplify market swings rather than hedge them.
That is undermining the traditional 60/40 portfolio model that relies on fixed income for both income and diversification.
"The value proposition of bonds in a portfolio is really quite challenged with the negative bond-equity correlation non-existent," said Jonathan Cohn, head of U.S. rates desk strategy at Nomura.
The issue has been building since 2021, when inflation surged, and has regained momentum with rising oil prices amid the Iran war.
For many portfolio managers, the more troubling issue is not the level of yields alone, but what the move reveals about bonds' diminishing role as a portfolio stabilizer.
Fiscal concerns are adding further pressure at the long end of the curve. The term premium on 10-year notes recently reached around 0.86%.
Still, few investors are ready to declare the end of Treasuries as a core global asset. Shorter-term bonds are recommended for now.
