A lasting bond
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High-grade sovereign (or government) bonds remain as relevant as ever in an uncertain and complex market environment. Today's bond yields are indeed low, and some investors may be finding it difficult to justify a portfolio allocation to high-grade bonds.

However, research and experience shows that in periods of market stress, the inclusion of high-grade bonds in a portfolio can provide investors with the opportunity for balance given their defensive characteristics, the mitigation of risk through low correlation with risk assets, and relatively robust returns over time.

In current times, central bankers' range of liquidity and accommodation measures in response to the coronavirus (COVID-19) pandemic have undoubtedly been enormous.

Most notably, a number of policymakers have chosen to cut their policy rates to even lower levels (including the US, Canada, UK and Norway), and of course in Australia, policy rates have fallen to 0.25%.

With the Reserve Bank of Australia (RBA) target cash rate reaching historic lows, many multi-asset investors are questioning the role of high-grade bonds in portfolios. That is, how much more can yields fall and can they still be relied on as a defence against risk assets?

Australian high-grade bonds have proven to be effective diversifiers for balanced portfolios, especially during stressed market environments.

A look at the history of Australian shares and their drawdown (the maximum drawdown measures the lowest point of an investment after its most recent high value of an investment achieved) episodes since 1976 shows there have been 22 such cases.

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