U.S. Treasuries, long viewed as a risk-free investment and a haven in tough times, have been behaving badly in the face of tariff uncertainty.
The problem: During Wall Street's early-April sell-off in stocks, Treasury prices went down, too.
That scared Wall Street. The reason? U.S. government bonds did not do what they usually do — and are expected to do — when volatility strikes: provide ballast and downside protection to a portfolio.
There was no place to hide. Even investors with a well-diversified, balanced portfolio of 60% stocks and 40% bonds felt the pain. Analysts call the phenomenon of bonds and stocks moving in the same direction "asset correlation." This type of price action, if it persists, is problematic.
How Buy And Sell Stocks In Bull And Bear Markets
Treasuries Don't Do Their Job
Normally, these two major asset classes are noncorrelated. That means when stocks fall, bonds rise. That didn't happen in this month's market tumult. U.S. stocks, bonds and the dollar all declined in tandem.
The cause of the risk-off sentiment on U.S.-based assets was twofold, Wall Street experts say. One, confusion caused by the Trump administration's tariff policy put in question the U.S.' reliability as a trading partner. And two, concern is rising among investors that U.S. assets are being viewed less favorably by global investors.
And while Wall Street experts say that odds of the U.S. Treasury market losing its haven status are low, they say the sharp decline in both stocks and bonds is a wake-up call.
In short, it might be a good time to think about finding other asset classes to hedge stock market risk and protect against downside.
"Investors need to think about what they can put in their portfolio that's going to help reduce correlation and help protect against longer stock market drawdowns," said Kristian Kerr, head of macro strategy at LPL Financial.
Finding The Bright Side
The good news? There are ways investors with a 60/40 portfolio can add more shock absorbers to the 40% of their portfolio designed to reduce volatility and offset stock losses.
It's important to note that experts are not suggesting you give up on Treasuries. U.S. government bonds are still the most liquid and largest fixed-income market in the world. The experts are advising you to look for alternative assets to diversify your risk.
"You're still going to have Treasuries in your portfolio," said Adam Farstrup, head of the multi-asset Americas branch at Schroders, a U.K.-based asset manager. "You also need to consider what are the other types of assets that can help provide portfolio protection when Treasury bonds aren't working."
Farstrup, citing historical performance, says stock and bond performance tends to be more correlated and rise and fall in tandem during periods of high inflation.
What are asset classes that can protect against widespread portfolio losses and allow you to sleep better?
Consider Short-Maturity Treasuries
To avoid interest-rate risk, buy short-duration Treasuries, or T-bills with maturities less than one year, says Adrian Helfert. Helfert is manager of Westwood Income Opportunity Fund and chief investment officer of alternative and multi-asset portfolios at Westwood Holdings Group.
Holding longer-term Treasuries, such as a 10-year note or 30-year bond, means you will take on more interest-rate risk. You'll face larger losses if rates spike and bond prices tumble.
"That's not a safe haven," said Helfert. "You want to own short-duration Treasuries with lower interest-rate sensitivity."
Currently, a three-month T-bill yields 4.31%, a six-month Treasury pays 4.19% in interest and a one-year T-note yields 3.96%. Those plump yields are competitive with the 10-year Treasury note's 4.30% yield.
Look At Foreign Bonds
Investing in foreign bond markets, such as European markets like Germany, might make sense. Germany is issuing more bonds to fund its military buildup. The eurozone is taking on more of its own security responsibility. Such bonds can also help diversify the fixed-income portion of your portfolio, Helfert says.
For broad foreign fixed-income exposure, consider the Vanguard Total International Bond ETF, which yields 3.17% and invests in global investment-grade, non-U.S.-dollar denominated bonds. If German bonds are what you're after, the iShares Germany Government Bond ETF, which is up 2.4% this year, can provide additional ballast to your bond holdings.
"Foreign bond markets, such as Germany, could become a bond safe haven in the future," said Helfert. For now, however, foreign bond markets simply don't have the liquidity and market size to serve as a legitimate haven for global dollars seeking shelter.
Investors can also hedge their stock risk by ensuring they are not making large bets in a certain sector of the market or a specific style, such as growth, adds Helfert.
"Having some of your equity dollars in defensive areas like health care is another hedging strategy that ensures you'll capture market upside but not get overly hurt on the downside," said Helfert.
Size Up Gold
Gold, known for its protective nature when the world turns volatile and inflation is running hot, is another buffer to consider, says LPL's Kerr. The yellow metal has been on tear amid sticky inflation, wars abroad and uncertainty surrounding U.S. economic policy.
On Wednesday, gold hit a fresh record high of $3,355 per ounce. SPDR Gold Shares surpassed $100 billion in assets in trading this month. It exposes investors to gold without having to physically hold the metal. The ETF was up 23% through April 15.
As volatility and geopolitical uncertainty continue to drive risk-off sentiment, investors are increasingly turning to gold as a strategic safe haven, notes George Milling-Stanley, chief gold strategist at State Street Global Advisors.
Still, it's hard to rely on gold as a true haven. Despite being a noncorrelated asset to stocks, it is a highly volatile asset class prone to big price swings. "Gold doesn't always protect you," said Helfert, noting that gold did not work as a diversifier during the 2008 financial crisis or the short-lived Covid-driven stock market crash in 2020.
Add Managed Futures Funds
Actively managed futures funds can add ballast to a portfolio due to their ability to short, or profit from asset declines, in a wide array of assets. Those assets range from stocks and bonds to currencies and commodities, says LPL's Kerr. "The fact that these funds can go both ways — long and short — gives you that stabilizing aspect," Kerr said.
For example, if stocks are falling, fund managers can profit from shorting index futures on, say, the S&P 500. Similarly, if bonds are declining, they can bet against bonds as well to generate returns to offset losses elsewhere in a portfolio, Kerr says.
Create A '10 By 4' Asset Mix
Don't put all your fixed-income or downside-protection part of your portfolio in bonds. Consider divvying up the safe 40% into four investments with a weighting of 10% each, says Bruce Maginn, financial advisor at Solomon Financial. You could also break that 40% piece of your portfolio down to eight different asset classes with a 5% weight in each.
The benefit of this approach is you will always have something working and rising in value that you can sell to raise cash if you need it. "You can pick and choose, and use common sense if you need to sell," said Maginn.
Other portfolio diversifiers to consider are so-called "buffer ETFs, which limit your investment downside by capping your upside," said Maginn. He also says real estate investment trusts with a focus on multifamily housing that benefit from a shortage of housing and rising rents can provide a noncorrelated component to a broader portfolio.
