▲Do you see any potential risks to this approach? But in a low-rate environment, we think that’s demonstrably true only further out the yield curve, where correlation and volatility have held up better, and where the zero bound is less constraining." "Our view is that government bonds and US Treasury securities, in particular, remain a viable portfolio hedge, particularly when inflation prospects are stable. ▲Do you have any thoughts on whether government bonds can continue to serve as portfolio hedges? Those tools project bonds’ hedging-friendly correlation properties out to longer maturities." "We believe there’s a fundamental economic reason for the durability of longer-maturity correlations: when short rates are constrained by the lower bound, central banks tend to use policy guidance that extends out over several years and initiate asset purchases. "However, we observed that the beta held up better at longer maturities, as a result of both correlation and volatility holding up relatively well, given that beta reflects both of those factors." The observed decrease in the beta of yields to equities at shorter maturities was largely a result of that drop in volatility." The volatility of the two-year yield backed off dramatically because short-term interest rates had dropped to the lower bound and were expected to stay there, so there was limited room for the two-year yield to move. "One thing we observed is that the beta of shorter-term US Treasury yields to equities decreased meaningfully. "Following that sharp decline in yields at the outset of the crisis, concerns about potential hedging properties of these bonds only grew." ▲So what have you observed since the outset of the pandemic? (Note: A beta less than 1 indicates that the investment is less volatile than the benchmark.) "Despite those concerns, when the pandemic hit and the market de-risked in February and March 2020, we saw US Treasury yields decline more than might have been expected based on their historical betas, meaning their perceived hedging properties held up well." However, in the years leading up to the pandemic, the investment community grew increasingly concerned about the effectiveness of these bonds as hedging instruments in the face of low yields, a situation that might reduce their room to rally in a risk-off event." "In recent decades, investors have used Treasuries as safe haven assets in their portfolios because these bonds have tended to rally when equities sell off. How did that hedging role play out at the onset of the Covid-19 pandemic? ▲Government bonds have long been seen as a key hedging tool for investors. The following is a transcript of the interview. As of March 2021, the investment group had more than $55 billion in investment and committed capital. Shaw gained its name for quantitative investing. Sack said in a written interview with Market Insight, conducted on the sidelines of the ASK Conference 2021 hosted by The Korea Economic Daily on May 12.įounded in 1988, The D. His remarks come as investors are increasingly doubtful about the role of bonds as an inflation hedging tool in the record-low interest rate era. But in a low rate environment, we think that’s demonstrably true only further out the yield curve." "In the recent low rate environment, a viable strategy may be to move further out the US Treasury yield curve, where volatility and correlation properties have held up better relative to shorter maturities," Shaw group’s director of global economics and a member of its discretionary macro trading unit. But in the medium- to long-term, the US government bonds of longer maturities will become effective hedging tools, said Brian Sack, The D. The rise in US Treasury yields over the past few months reflect investor concerns about inflationary pressure. Shaw group, a New York-based investment firm, suggesting long-term US yields may have room to decline further. US Treasury bonds with longer maturities remain effective hedging instruments against inflation in the current low rate environment, according to The D. Brian Sack, The D. E. Shaw Group Director of Global Economics
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