Our services in the selected location:
  • No services available for your region.
Select Location:
Remember my selection
We have been made aware that there are external parties falsely claiming to carry out financial services on behalf of Goldman Sachs (including Goldman Sachs Asset Management International and Goldman Sachs International) in order to market fake investment products and to solicit monetary payments. These external parties may pose as Goldman Sachs through the use of fraudulent communications via email, instant messaging or phone, as well as through the use of fake brochures and other documents containing Goldman Sachs branding and logos.
The FCA has issued warnings about these fraudulent activities which can be found here and here.
It is important to know that any communication you receive from Goldman Sachs would only come from an @gs.com e-mail address and/or be found on the goldmansachs.com website. Further information regarding how you can protect yourself from fraudulent activity online and how you can contact us about this can be found on the Goldman Sachs Security page, available here.
Your browser is out of date. It has known security flaws and may not display all features of this and other websites

22 June 2020 | GSAM Connect

A Stress Test for Your Core Bond Allocation

As any athlete can attest, strong core muscles improve stability and balance while helping to reduce injury risk. A core fixed-income allocation should do the same for an investment portfolio, and we think now’s a good time for investors to make sure theirs is up to the challenge.

In our view, a strong core allocation is one that can provide income, stability and diversification against equity risk throughout the market cycle. This is critically important in today’s volatile market environment, where uncertainty is the new normal. To help investors perform due diligence on their core bond allocations, here are three key rules that we think a solid core foundation should live by.

1. Be “Style-Pure”

This means sticking to the types of high-quality, investment-grade fixed-income assets that tend to do well when markets are volatile and the economy is weak. Lower quality assets, such as high-yield credit and emerging-market debt, should in our view live in higher-risk, return-seeking parts of a fixed-income allocation. Some of these lower-quality sectors have behaved more like equities (Exhibit 1).

Exhibit 1: Some Fixed-Income Sectors Have Behaved More Like Equities

Source: GSAM, Bloomberg Barclays, JP Morgan. As of 5/31/2020. The above fixed income sectors are proxied by the following indices: US Treasury (Bloomberg Barclays US Treasury Index); US Aggregate (Bloomberg Barclays US Aggregate Bond Index); US Corporate High Yield (Bloomberg Barclays US Corporate High Yield Bond Index); Bank Loans (Credit Suisse Leveraged Loan Index); Emerging Markets Debt (JPMorgan EMBI Global Diversified Index). Please see end notes for index definitions.


We think having a style-pure core allocation is especially important today. This is because many investors have in recent years ratcheted up exposure to lower-quality bonds and equities in their broader asset allocations as these assets benefitted from a solid global growth environment. But as the recent downturn showed, they offer little protection and tend to lag investment-grade rated fixed income assets when risk-off sentiment takes hold. High-quality bonds are more duration-sensitive and tend to get a boost from flight-to-quality dynamics.

2. Take Advantage of the Full Investment-Grade Universe

Investors shouldn’t limit their core allocation to one or two sectors. With lower yields in the overall bond market and the tendency for sector leadership to rotate, a core bond allocation should look across the entire investment grade fixed-income market for opportunities. That’s why we believe in a multi-sector approach to core. The global investment-grade fixed-income market is $60 trillion in size and spans more than 25,000 issues across sovereign, government-related, corporate and securitized debt (as of 5-31-2020).

When determining the appropriate blend, we believe a solid core strategy should tilt toward assets that best compensate investors for the risks they’re taking. Today, we believe high-quality spread sectors such as investment-grade corporates and agency mortgage-backed securities offer a compelling risk/return profile and are likely to benefit from investor demand, policy support and attractive valuations.

3. Keep Your Balance

We believe a solid core foundation should keep duration close to “neutral,” or near market levels (6.0 years for the Bloomberg Barclays U.S. Aggregate Index and 7.3 years for the Bloomberg Barclays Global Aggregate Index, as of 5-31-2020). In our view, duration provides portfolios with staying power by helping to offset downturns in credit assets. Having the right level of duration enables investors to participate in market upsides while cushioning downside risk. Furthermore, interest-rate forecasting is difficult to do, as demonstrated by the rate volatility we have seen in recent years.

These are unusual and uncertain times for investors. But the way we see it, the key pillars of a solid core fixed income allocation haven’t changed: stick to a style-pure strategy, embrace a multi-sector approach, and try to maintain your balance.


Stay posted on the latest market developments and key themes for your portfolios and practices.
Get Connected

Related Insights

Don't Blink

The COVID-19 pandemic, much like the global financial crisis, is a catalyst for change. If the global financial crisis created a “new normal”, the coronavirus outbreak has ushered in a time of rapid change. Welcome to the Great Acceleration.

What Rising Mortgage Forbearance Means for Fixed Income Investors

Mortgage-backed securities (MBS) are a large component of the US fixed income market, accounting for about 27% of the Bloomberg US Aggregate Bond Index. With rising unemployment leading more mortgage borrowers to request forbearance on their loans, we discuss the potential implications for bond investors.