Do Treasuries still hedge equities?

The protection capability of Treasury Notes against large and sudden equity declines has fundamentally remained intact despite the rise in interest rates this year.

Treasuries have been considered a good hedge against equities because during significant market downturns there is often a flight to the safe-haven Treasury asset. However, this year we have seen periods of simultaneous declines in both equity and bonds as a result of rising interest rates and inflation expectations. This has led many to speculate that treasuries (and bonds in general) may not be a good hedge or diversifier to equities in the coming years.

Correlation statistics show how likely two investments are to move together. If the two investments are perfectly correlated +1, they increase or decrease in value simultaneously. Conversely, if they have a perfectly negative correlation -1, then they will move in opposite directions.

The 7-10 Year Treasury Note correlation with US equities is -0.36 for 2018 YTD which is the same at -0.36 for the 2017 calendar year.1 This shows that, so far, the rise in rates has not weakened the negative correlation observed last year and on average the tendency is still for Treasuries to rise on days when the equity markets declined.

The negative correlation measured over just the US trading day is even stronger at -0.48.2 This better isolates the relationship between Treasuries and US equities by partially excluding the impacts of pre-market data releases, some of which were inflation related.

Most importantly, Treasury Notes experienced gains on each of the 11 largest US down market trading days of 2018. This indicates that Treasuries may still provide an effective offset to equity risks in times of significant market stress particularly when the decline is not associated with potential inflationary impacts.

Conversely, Treasuries declined on each of the 6 largest up market days which add to the strong negative correlation observed under extreme moves.

While Treasuries may underperform in a rising interest rate scenario, the statistical evidence suggests no material change to the observed recent historical negative correlation.


1 The 7-10-year Treasury Note is represented by the iShares 7-10 Year Treasury Bond ETF (IEF) daily return. US Equity is represented by the daily return of the S&P 500 TR index. Data through May 31, 2018.

2 US trading day for the S&P 500 TR Index measured from market open to close. 10 Year Treasuries is represented by the 10 Year Treasury Note future active contract measured intra-day from 9:30 to 16:00 EST. Data through May 31, 2018

Past performance is not a guarantee of future results. This material is not intended to be relied upon as a forecast, research or investment advice. This material is not an offer, solicitation or recommendation to buy or sell any securities, products or services or to adopt any investment strategy. The material is subject to further review and revision. Opinions expressed are as of June 2018 and may change at any time for any reason.

In preparing this material, AnchorPath has relied on information which is publicly available and sources believed to be reliable. This information has not been independently verified by AnchorPath and is not necessarily all-inclusive and is not guaranteed as to accuracy. AnchorPath makes no representation that any funds, products or services are suitable or appropriate for the recipient. Recipients must make their own independent decisions and investigation regarding any strategies, securities or financial instruments. As such, AnchorPath and its directors, officers, employees, agents and consultants make no representation or warranty as to the accuracy, completeness, or reliability of this material, and accept no liability for any loss or damage as a result of any errors or omissions in this material or otherwise arising in connection with it. AnchorPath’s strategies maintain long positions in Treasury Notes including IEF and 10 Year Treasury Note futures contracts.

This material may contain certain forward-looking statements such as forecasts, estimates, projections and opinions. AnchorPath makes no representation that any forward-looking statement will be achieved or will prove to be correct. Any discussion of risks contained herein with respect to any product or service should not be considered to be a disclosure or complete discussion of risks.

Index returns do not reflect transaction costs, fees and expenses that would otherwise reduce performance. It is not possible to invest in an index. Investing in any exchange traded instruments does not guarantee that an investor will make money or avoid losing capital, nor is the investment risk-free.

Close Menu