Which Bonds Provide the Biggest Diversification Benefit?

Bonds' correlations with stocks have risen recently, while the diversification benefits of cash have been on the upswing. [Morningstar](?utm_source=eloqua&utm_medium=email&utm_campaign=newsletter_improvingfinances&utm_content=52991&elqTrackId=346aef3e984e47f7a0a7be46ef0268d3&elq=b2ca310db24346f3b1f89efa09b7dee5&elqaid=52991&elqat=1&elqCampaignId=26808) [Improving Your Finances] Improving Your Finances with [Christine Benz]( [Christine Benz] As interest rates shot up in early 2022 and continued to increase through most of 2023, bonds' long-standing pattern of diversifying stock exposure was turned on its head. While most bond types fell less than stocks in 2022, their returns were directionally similar: down. That has heightened bonds' correlation with stocks, according to Morningstar's recently released [Diversification Landscape]( report from Amy Arnott, Karen Zaya, and me. But over the long arc of market history, high-quality bonds have shown an ability to diversify stock exposure. Not only are many equity market shocks characterized by a flight to safety in which Treasury bonds thrive, but in weakening economic conditions, interest rates are often simultaneously declining, boosting bond prices. Lower-quality bonds, meanwhile, have shown much more of a connection to stock-price movements and therefore should be considered third-tier diversifiers for investors' equity portfolios. Meanwhile, the virtue of cash as a diversifier has spiked amid recent market action. Even as rising interest rates crimped stock and bond prices in 2022, they've been nothing but a boon for cash investors, who don't experience share-price volatility but get to enjoy higher yields. [I wrote about which parts of the bond market have best diversified equity exposure]( over the past three years and longer time frames, too. In a related vein, I appreciated [Sarah Hansen's forward-looking take on the bond market]( the outlook for rate cuts, recent bond-market performance, and whether investors getting into bonds now have already missed the boat. John Rekenthaler's ongoing series highlighting the best index funds is also well worth a look. [Last week’s piece highlighted the best US stock index funds]( and this week's focuses on [foreign-stock index trackers](. Encouragingly, most of the asset flows into index funds over the past several years have found their way to very low-cost options. Finally, one of the most vexing aspects of new retirement regulations relates to an account that shows up in most of our portfolios: the traditional IRA. Tax expert Ed Slott says that everyone's confused about the ins and outs of the new rules, so [he sat down with me to unpack them for us](. Would that we could all approach our work with as much energy as Ed applies to taxes! With warm regards, Christine Benz [Which Bonds Provide the Biggest Diversification Benefit?]( The bond rout in 2022 upended notions about correlations, but high-quality bonds and cash have been solid diversifiers over longer stretches. [Find Out More]( Share: [facebook]( [twitter]( [linkedin]( ADVERTISEMENT [media]( [media] [How Did Diversified Portfolios Hold Up in 2023?]( Delve into Morningstar's 2023 analysis of portfolio diversification strategies. Uncover insights on correlation trends, asset class performance, and what it all means for building diversified portfolios. [Read More]( [Where to Invest In Bonds Now]( The Fed is signaling rate cuts ahead. Here’s where to lock in higher yields. [Check It Out]( [The Best US Stock Index Funds]( Their prices are very much right. [See Top Funds]( [The Best International Stock Index Funds]( Excellent choices abound in five investment categories. [Get the LIst]( [Be Aware of These New Rules for Inherited IRAs]( Tax and IRA expert Ed Slott discusses whether there’s any way to lessen the tax bill. [Watch Now]( [Peter Mallouk: The Financial Advice Industry Is ‘Still Very Messy’]( The founder and CEO of Creative Planning on why AI in financial advice is ‘inevitable’ and whether financial advisors will face fee compression. [Listen Today]( Get Top Stock Picks and Market Insights Every Week on The Morning Filter. Every Monday morning, Susan Dziubinski sits down with Morningstar Chief U.S. markets strategist Dave Sekera to discuss what's on his radar, new Morningstar research, and stock picks or pans for the week ahead. [Watch Now.](morningstar/streams?utm_source=eloqua&utm_medium=email&utm_campaign=newsletter_improvingfinances&utm_content=52991) Stay connected: [twitter]( [facebook]( [linkedin]( [instagram]( [YouTube]( [Apple News]( [View online]( | [See all newsletters]( | [Share your feedback]( [Unsubscribe]( from this newsletter. Or update your [email preferences](. © 2024 Morningstar, Inc. All Rights Reserved. 22 W. Washington St. Chicago, IL 60602