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Arif Husain, lead manager of the T. Rowe Price Dynamic Global Bond* strategy, sets out three steps for a return to traditional bond benefits

T. Rowe Price

Historically, investors thought of their bond allocation as the reassuringly boring, ‘sleep at night’ component of their portfolio. Bonds typically delivered three benefits: steady income, diversification versus equities and downside protection at times of uncertainty. In today’s low-yield environment, getting three from three is easier said than done. Is it possible to go back to basics with a fixed income portfolio that behaves like an old-school bond investment?

One challenge is that, while lower-risk assets such as high-quality government bonds still have lower or even negative correlation to equities, the yield has become almost negligible. By contrast, high yield credit and emerging market debt both have higher correlations to equities. During times of market stress, they may not provide the same level of diversification as higher-quality fixed income assets.

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