For decades, investors have considered bonds to be the "safe haven" of their investment portfolios. However, that may all change soon.
Over the past twenty years, a generally benign interest rate environment has helped bonds be a source of both income and capital gains for a generation of investors. But with interest rates in the US at historically low levels, it is likely that rates will rise if the economy strengthens between now and 2015-2016. In turn, that could have a substantially negative impact on long term bonds. Sharath Sury, Executive Director of the Institute For Financial Innovation and Risk Management (SIFIRM) and an Adjunct Professor of Economics at the University of California, and his father, Manda Sury, CEO of Chicago Analytic Trading Co. and an Adjunct Professor of Finance at DePaul University, recently released new findings that show that investors with significant exposure to long term bonds may be able to protect themselves through allocations to commodities in particular, via exposure to the oil-related energy sector. In the new study, "The Impact of Crude Oil Investments in Bond Portfolios: “Can oil serve as a hedge against long term bonds?" the father-and-son economists examine exchange-traded fund (ETF) data over the past five years and in various economic cycles and find a surprisingly significant negative correlation between long term bonds and certain oil-related instruments. Their findings suggest that in a growing economic environment, the inclusion of oil-related investments may provide strong diversification benefits to bond-only portfolios. "Practitioners and academics have known for some time that an allocation to commodities in general may provide useful diversification to a bond or equity portfolio," said SIFIRM's Sury. "What is surprising is just how strong the inverse correlation has been between long duration bonds and investments in the oil and gas sector."