At a glance
- The numbers were never the point: investors held the bond sleeve for income and for a cushion that depended on stocks and bonds moving in opposite directions in a selloff, and the data say that condition has ended.
- The monthly correlation between the S&P 500 and that Treasury position ran minus 0.40 from 2016 through 2020, then flipped to positive 0.55 for 2021 through 2025, reaching 0.61 in 2022—the year the 60/40 fell 16.64%, its bond sleeve lost more than 15%, and the Bloomberg U.S. Aggregate dropped about 13%.
- Target-date construction inherits the same premise—adding bonds as retirement nears—and a flipped correlation says that logic underestimates risk in an inflation-led shock.
From 2016 through 2025, a hypothetical 60/40 allocation to the S&P 500 and iShares 7- to 10-Year Treasury bond ETFs returned 9.52% annualized with 9.82% realized volatility, 6.11% after inflation, and gains in eight of ten years. The numbers were never the point: investors held the bond sleeve for income and for a cushion that depended on stocks and bonds moving in opposite directions in a selloff, and the data say that condition has ended.
The monthly correlation between the S&P 500 and that Treasury position ran minus 0.40 from 2016 through 2020, then flipped to positive 0.55 for 2021 through 2025, reaching 0.61 in 2022—the year the 60/40 fell 16.64%, its bond sleeve lost more than 15%, and the Bloomberg U.S. Aggregate dropped about 13%. BlackRock and J.P. Morgan, cited in the analysis, draw a clean line: bonds still diversify during recessions but fail as hedges when inflation is driving the selloff.
Target-date construction inherits the same premise—adding bonds as retirement nears—and a flipped correlation says that logic underestimates risk in an inflation-led shock. Plan sponsors should stop assuming a bond-heavy last decade is inherently safer, and as this publication has reported, income features have become the next battleground in target-date design; an income layer built on a bond position that falls alongside equities in an inflation shock will not do the job.
None of this makes the bond allocation worthless—bonds still pay income and still protect in recessions—but the 2016-2020 correlation was a product of its rate regime, and treating it as permanent is a forecast, not a hedge. Plans should stress-test their drawdown layer against 2022, when the 60/40 fell 16.64% with bonds down more than 15%, and ask whether their target-date funds are actually positioned for the next shock; the answer is not a different bond index but a different assumption about what bonds are for.
Reported by the Investments desk from PLANADVISER. Published . Corrections