(Kitco News) - Demand for safe-haven assets continues to grow as investors seek protection from ongoing economic turmoil. A key question attracting attention is: What role do bonds play in a portfolio alongside alternative assets like gold?
The U.S. and global bond markets were featured topics during the Sohn Montreal Conference on Wednesday. Nancy Zimmerman, Co-Founder and Managing Partner at Bracebridge Capital, initiated the discussion by stating that bonds might not provide the diversification investors need in the current environment.
She noted that in recent years, bonds and equities have become significantly more correlated, partly due to the continued increase in the supply of Treasuries. However, she pointed out that the traditional 60/40 portfolio allocation was never meant to become the industry standard.
She explained that the ratio was initially introduced as a “strawman argument” or benchmark to evaluate a portfolio’s performance.
As historical trends continue to shift, Zimmerman recommens that investors consider more market-neutral assets. These include global equities, aggregate bonds, high-yield indexes, three-month Treasury bills, and, of course, gold.
Zimmerman briefly mentioned Bitcoin as an alternative asset but emphasized that its gains are accompanied by significant volatility.
While Zimmerman didn’t specifically recommend gold, she observed that it has become a popular neutral asset. She explained that neutral assets are attractive due to their inefficiencies, which can create arbitrage opportunities. “There is room between the wall and the wallpaper,” she said—space that investors can exploit.
However, Zimmerman also cautioned that no trade is without risks. Using gold as an example, she highlighted the existence of two gold prices: futures prices dominated by North American markets and spot prices quoted in London. She added that these inefficiencies come with their own set of risks.
“You want to make sure you are capturing alpha and not giving it away,” she said.
Despite the risks, Zimmerman asserted that a diversified portfolio offers better returns than the traditional 60/40 model. She pointed out that a 60/30/10 balanced portfolio saw cumulative 30-year gains of 171%, while a 60/20/20 portfolio achieved cumulative gains of 364%.
While U.S. bonds have garnered the most attention in recent weeks, Zimmerman emphasized that the growing correlation between bonds and equities is now a broader trend, as governments issue record debt amid increasing deficits.
But not everyone is ready to give up on bonds. Marc-André Soublière, Senior VP of Fixed Income and Absolute Return at Trans-Canada Capital, said in his presentation that he remains bullish on long-dated U.S. Treasuries.
He explained that he is purchasing long-dated bonds, as slower economic growth will shift focus away from the U.S. deficit.
“Deficits are not the problem. The problem is deficits when the economy is running hot. No one complained about deficits in 2020,” he said. “The problem was they kept spending way too much as the economy recovered.”
Soublière said he is buying 20-year bonds while selling 10- and 30-year notes, as he expects the long end of the curve to flatten. He described last month’s bond market volatility as noise in an uncertain environment.
As volatility begins to subside, he expects demand for long bonds to increase, driven by the appeal of higher yields offering attractive long-term returns.
“Real rates in the U.S. last week were at 2.70. You have to go back 15 years to find real rates at 2.70. This would be nirvana for any pension fund in the world,” he said.
Soublière added that market uncertainty and volatility will continue to pressure former President Trump into moderating his aggressive tariff policies, which could ultimately help restore economic normalcy.
“Last month, we had the trifecta: the S&P going down, the dollar going down, and rates going up—so prices going down. Where does that happen? In emerging market currencies like Argentina. This should not be happening in a developed country like the U.S. So clearly, [the government’s] messaging was wrong, and it forced Trump to back off on these ridiculous high tariffs.”
For 30 years, the Sohn Conference Foundation has raised money for pediatric healthcare and cancer research. This was the foundation's first conference in Canada, and the one-day event raised $1.27 million for the Montreal Children’s Hospital and Sainte-Justine Hospital.
