Adam Marden, Portfolio Manager for Dynamic Global Bond Strategy at T. Rowe Price, shares his views on how traditional safe-haven assets are evolving in today’s shifting market environment:
It’s important to frame why defensive asset classes are changing. From 2008 to 2020, managing downside risk in portfolios was managing the downside of growth rather than the upside in inflation. Today, we have several directions of risk, including high inflation, stagflation, and low growth.
At the end of the day, for growth risks, short-maturity U.S. Treasuries are the diversified for a portfolio with equities as well as high yield bonds or bank loans. In an inflationary environment, however, there is still downside risk to holding short-term Treasury debt because it has some duration. But short Treasuries now provide decent yield to compensate for that risk.
The long end of the U.S. Treasury yield curve was the perfect hedge post-global financial crisis (GFC) because the Fed was mostly on hold and inflation was never a realized worry. It provided “Armageddon insurance” for any and all risks involving geopolitics or flagging economic growth. However, Treasury supply dynamics are negative today with the government’s large budget deficit, and that would only get worse if we experience a growth shock that triggers even more spending. I don’t think long Treasuries present many defensive characteristics today unless we see a major shift down in growth and inflation levels to what we experienced between the GFC and the start of the pandemic.
Also read: Tariffs and Yield Curves
It’s important to note that the dollar’s consistently defensive performance has been during a U.S. exceptionalism time period. If that narrative flips, the U.S. dollar’s defensive characteristics could erode quickly as investor demand for other currencies grows.
