What does the chart show?
 
This chart shows the difference in 30-day volatility between the iShares 20+ Year Treasury Bond ETF (Exchange Traded Fund) and the SPDR S&P 500 Trust ETF. ETFs are funds traded on stock exchanges and typically hold a range of holdings in a specific asset class with the aim of tracking their overall price movements. In the chart we can see the volatility spread between bond and equity ETFs reaching its highest ever positive level indicating that long term treasuries are at their most volatile in relation to equities. Typically, we would expect to see lower levels of volatility in government bonds compared to equities, highlighted by the negative average long term spread, as these securities tend to provide more predictable returns for investors and therefore more stability in supply and demand dynamics. Equities on the other hand are more exposed to investor sentiment, economic conditions and business cycles, leading to more volatile price movements.

 Why is this important?

 This is significant for investors as the typical risk reduction benefits that bonds traditionally offer in portfolios are compromised due to large swings in prices. Investors have been on high alert, interpreting statements from the Federal Reserve, and swiftly reacting to economic data releases in an attempt to anticipate the trajectory of interest rates. Additionally growing fears regarding the escalation of the ongoing conflict in the Middle East have caused geopolitical tensions to teeter on the edge. These factors are collectively contributing to consistent inflows and outflows in treasuries resulting in the recent dramatic price fluctuations. Given the unlikelihood of a swift resolution for these uncertainties in the short term, we can expect to see this volatility persisting for the time being, elevating risk in portfolios. Diversification is critical to help manage risk – by investing in a range of asset classes and investment styles, investors can spread their risk and reduce volatility whilst minimising drawdowns. Building in additional diversification levers to further smooth the investment journey is an approach that we have always adhered to and have implemented successfully over the decades.