No Longer Superheroes? The Twilight of Bonds

Challenging Core Asset Allocation Assumptions

June 2020. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Bonds had superhero qualities over the last few decades
  • The case for bonds in asset allocation is not clear when yields are low or negative
  • Japan can be used as a roadmap for the outlook of a 60/40 portfolio in the US or Europe


“Faster than a speeding bullet. More powerful than a locomotive. Able to leap tall buildings in a single bound.”

And he can fly and shoot lasers from his eyes. Superman not only has the best superpowers, but he is also handsome, charming, and humble. Plus he dearly loves his mom and farm. He might come off a little boring and straitlaced compared to more colorful characters like Ironman or Thor, but he’s clearly the superhero who wins over the most hearts.

One-on-one, no one can outmatch him. Except perhaps someone who brings the proverbial gun to a knife fight. In this case, that gun is Kryptonite, Superman’s only known weakness. The substance renders his powers useless and makes him a normal man — one who can feel pain.

In the investment world, fixed-income instruments have their own Kryptonite: quantitative easing (QE). The central banks’ unconventional monetary policy of buying longer-term securities from the open market to increase the money supply and encourage lending and investment has pushed bond yields in most developed markets toward zero and even into negative territory since the global financial crisis (GFC).

Interest rates have gone negative in Japan and briefly fell below zero in the United Kingdom. The latter has increased its public debt due to the COVID-19 crisis, which ought to make it less creditworthy. Yet the United Kingdom has just issued its first negative yielding bond.

Over the last 40 years, bonds were the superheroes of investment portfolios. They generated high risk-adjusted returns given steadily declining yields and were mostly negatively correlated to equities and therefore provided attractive diversification benefits. Some investors, such as Ray Dalio at Bridgewater Associates, built their empires on the back of this tailwind.

But with low, nil, or negative yields, how much can bonds still contribute to a portfolio? Has the QE Kryptonite permanently disabled their superhe