Author Details

Juan Sampieri

Juan Sampieri
Senior Associate, MSCI Research

Andy Sparks

Andy Sparks
Managing Director, MSCI Research

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Did Bonds Deliver? Leveraging Fixed Income During the COVID Crisis

  • Investors with equity-like return targets might think there is little role for investment-grade bonds in achieving these targets, given the generally lower historical returns of bonds compared to equities.
  • Our analysis compared the historical performance of the classic 60%-equity/40%-bond portfolio to a hypothetical risk-parity portfolio and to another employing a higher risk allocation to equities.
  • These latter two approaches applied significant leverage to bond-centric portfolios and would have performed well during 2020, despite deleveraging and the rebound in the equity market that began in late March.

Investors can employ leverage with relatively low-risk asset classes as they seek to compete with strategies in the higher-return/higher-volatility portion of the investment spectrum. One approach is to define the strategies based on risk allocations. Risk parity is a special form of risk allocation where portfolio weights are determined by equating risk allocations across factors or sectors.1


How Might Leveraged Strategies Have Performed During the COVID-19 Crisis?

In the exhibit below, we compare three hypothetical multi-asset-class portfolios rebalanced on a monthly basis. The first (60/40) had a 60% market-value weight in equities, 20% weight in investment-grade corporate bonds, 15% in U.S. Treasurys and 5% in Treasury inflation-protected securities (TIPS).

The other two used risk contributions to define the allocation between these four asset classes. The first hypothetical strategy was risk parity, and the second strategy assigned risk allocations of 40% to equities and 60% to investment-grade fixed income.2 During 2020, these risk allocations translated into equity-market-value weights of 11%-18% for the risk-parity approach and 16%-23% for the second strategy. We then applied leverage3 to these strategies to achieve a 10% risk target.4

The risk-allocation strategies both outperformed the 60/40 portfolio during the pre-COVID-19 part of 2020. This outperformance then accelerated during the initial stage of the crisis, as equities severely underperformed and Treasurys rallied significantly.

By the time that the strategies were rebalanced at the end of March, market volatilities had spiked and were at historically high levels. In response, the strategies assigned lower allocations to equities and corporates and higher allocations to Treasurys. Portfolio leverage also declined very significantly in order to maintain the strategies’ 10% risk targets.

Starting in late March, equity performance strongly rebounded. Returns on bonds were also positive but not nearly as strong as equities. The 60/40 portfolio gained relative to the risk-allocation strategies over this period. Between Jan. 1 and July 27, the risk-parity strategy outperformed the 60/40 portfolio by approximately 4.6% and the second risk strategy outperformed by approximately 2.3%.

Over the last 12 years the hypothetical strategies, with leverage and a 10% risk target, significantly outperformed the 60/40 portfolio.

We invite you to use the interactive exhibit below to see how the characteristics of the risk-based portfolios (with and without leverage) and the 60/40 portfolio changed during the crisis, as well as over the long term.


During the COVID Crisis, Deleveraging Did Not Necessarily Imply Poor Performance


U.S. Treasurys and TIPS are represented by Markit iBoxx indexes. The equity market is represented by the MSCI ACWI Index and U.S. investment-grade corporate bonds by the MSCI USD Investment Grade Corporate Bond Index. Source: IHS Markit, MSCI


Is Fixed Income Destined to Be the Low-Volatility, Low-Return Asset Class?

This year’s dramatic market moves may have caused significant deleveraging of assets in strategies with absolute volatility targets. But this deleveraging did not necessarily imply poor performance. Our analysis showed that leveraged portfolios with a high concentration of bonds performed well versus a 60/40 portfolio so far during 2020 — and over the last 12 years. Over this historical period, the performance of these leveraged portfolios illustrated that bonds were sometimes more than the low-volatility, low-return asset class.



1In a hypothetical risk-parity strategy with four different sectors, the risk contribution from equities may be 25%. By contrast, in the 60%/40 portfolio, higher-volatility sectors such as equities will generally contribute much greater risk to the portfolio than lower-volatility bond sectors such as U.S. Treasurys.

2We used the long-term version of the MSCI Multi-Asset Class Factor Model and the MSCI Open Optimizer to construct these portfolios based on risk contributions.

3The funding cost was assumed to be the 1-month Treasury bill plus 40 basis points.

4On an unlevered basis, during 2020, the minimum forecast risk on the risk-parity portfolio between Jan. 1 and June 30 (the last rebalancing date) was 3.6% and the maximum was 5.6%.



Further Reading

How could coronavirus impact credit markets?

Surging Corporate-Bond Supply: Reason to Worry?

Something for nothing? Increasing bond duration may not increase portfolio risk

Using Risk Analytics to Highlight Opportunities in Volatile Markets