
Due to the growing concern around the coronavirus outbreak (COVID-19) and the panic it is causing across global risk markets, the benchmark rates in 10-year and 30-year US Treasury securities have breached all-time low yields.
How does this particular market event affect investors and what does it mean for bonds?
Most importantly, it means the bond market is providing asset diversification and a proper hedge against the negative performance in risk assets. While credit spreads have widened swiftly with the sell-off in equity markets, government bonds have provided portfolios safety in times of uncertainty and economic and/or intangible risks in the world. In other words, they are serving the purpose that was intended.
While the S&P has given back most of the gains since December and continues to falter in February (-2.86% as of 2/25/2020), bonds have provided returns that are already higher than many experts initially predicted for all of 2020 (in less than 2 months).
February and YTD bond total returns:

Riskier bonds and high yield debt have not fared as well. Despite higher current yields, in times of high volatility, their price action is more closely correlated with equity markets.
Key takeaways and notes during this current market environment:
Continue to monitor the amount of risk in portfolios and rebalance to ensure diversification.
Conservative bonds are not just purchased for “stated” yield. They provide meaningful diversification to not only risk assets, but also many times are used to hedge business risk, as well as real estate holdings. Despite currently low overall yield levels, a conservative bond portfolio should always be an anchor and a cornerstone investment in a balanced allocation.
Key market thoughts from Piton during this period:
COVID-19 is a serious and global concern. We will continue to actively monitor the rate at which it is spreading and the economic consequences it may cause.
The virus and fallout is already likely to be a substantial hit to Q1-20 global growth, including US GDP
It is important to remember that there are also other matters influencing the late-cycle economy at the same time, notably: the market catalysts and risks around the US 2020 election. Historically, markets show sensitivity to a US election 3-months in advance of November. We are already seeing market reactions during the polarized Democratic primaries.
We are not yet reallocating portfolios or positioning differently.
Our team continues to review and monitor our opinions on current dynamics influencing the economy, inflation, fed policy, fiscal policy, technicals and intangibles and how these factors impact the bond market and our portfolio construction.
We believe in just a few weeks’ time, the picture on the coronavirus will be much clearer, allowing us to act accordingly in the best interest of our clients’ portfolios.
Please reach out to Brian Lockwood, CFA at 646-518-2800 to discuss current events, market moves and review your individual portfolio.