Bond ETF, Mutual Fund Correlation to the S&P 500

The matrix below is from Barclay’s iShares, showing the 1-year total return correlation between the S&P 500 (proxy SPY) and several key bond fund types available from iShares:

• (AGG): Lehman Aggregate Bonds
• (SHY): 1-3 year Treasuries
• (IEI): 3-7 year Treasuries
• (IEF): 7-10 year Treasuries
• (TLH): 10-20 year Treasuries
• (TLT): 20+ year Treasuries
• (MUB): National Municipal Bonds
• (LQD): Investment Grade Corporate Bonds
• (MBB): Mortgage Backed Bonds
• (HYG): High Yield (Junk) Bonds

click image to enlarge

The Barclay’s bond ETF correlations are for only one year, because many of the funds do not have three years of data, which is necessary for the next time period with the Barclay’s tool

Vanguard bond mutual funds have a similar, but not all the same objective funds, for which long-term returns are available for correlation between themselves and the S&P 500:

• VFINX: S&P 500
• VBFMX: Lehman Aggregate Bonds
• VFITX: Intermediate Treasuries
• VUSTX: Long Treasuries
• VFIIX: GNMA Bonds
• VWITX: Intermediate Tax-Exempt Bonds
• VFICX: Intermediate Investment Grade (Corporate) Bonds
• VWEHX: High Yield (Junk) Bonds

1-Year Correlations

3-Year Correlations

5-Year Correlations

10-Year Correlations

Bonds and cash are the principal winning class this year.  More investors will probably allocate more to bonds in the future, as a result of the drubbing they received in stocks, real estate and commodities.

More analysts are beginning to predict that bonds will do well in the near future.

US and other governments have done, and will do, a great deal to reliquefy the credit markets.  That may raise bond bids that were depressed due to liquidity problems, but the various bailout programs may also create inflation down the road that is damaging to bonds.

The flight to quality raised Treasury prices and lowered lesser quality credits.  When risk aversion decreases, Treasuries will probably decline and lesser credits will probably increase in price as investors rotate to higher risk for higher returns.

All fixed-income securities are are risk of loss of purchasing power due to inflation.

Rising interest rates, which will have to occur when the economy improves, tend to cause bonds to decline.

Bonds are an important portfolio volatility moderating asset class, and tend to reduce the severity of losses in down years.

Do-It-Yourself investors may find this data useful in portfolio design.

Comments

[donzelion:]

"All fixed-income securities are are risk of loss of purchasing power due to inflation."

Inflation hurts every fixed-income strategy, but wouldn't bond funds hold up better than owning actual bonds themselves (IF the bond funds had low enough fees, that is). TIPS (automatic inflation adjustment), short-duration funds, or aggregate bond funds (AGG, BND) ought to rebalance towards bond flows...

Makes sense to me to buy a hefty chunk of bond funds in a tax-advantaged account (IRA, 401k), and just let'er DRIP.

Jan 10 02:42 AM