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The Changing Role of Nominal Government Bonds in Asset Allocation&ast

John Campbell ()

The Geneva Risk and Insurance Review, 2009, vol. 34, issue 2, 89-104

Abstract: The covariance between nominal bonds and stocks has varied considerably over recent decades and has even switched sign. It has been predominantly positive in periods such as the late 1970s and early 1980s when the economy has experienced supply shocks and the central bank has lacked credibility. It has been predominantly negative in periods such as the 2000s when investors have feared weak aggregate demand and deflation. Nominal bonds are attractive to short-term equity investors when these bonds are negatively correlated with stocks, as has been the case during the 2000s and especially during the downturn of 2007–2008. They are attractive to conservative long-term investors when long-term inflationary expectations are stable, for then these bonds are close substitutes for inflation-indexed bonds that are riskless in the long term.

Date: 2009
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Handle: RePEc:pal:genrir:v:34:y:2009:i:2:p:89-104