Historically, the bond has been the parachute that systematically opens when equities drop. However, in 2022, its mechanism jammed. With the return of inflation, bonds ceased to be a shock absorber, instead becaming something of a dead weight.

From the 1970s to 2020, a period marked by declining average interest rates, the correlation between equities and bonds was negative (averaging around -0.4). The strategy of holding 60% equities and 40% bonds in a portfolio, known as the "60/40 allocation," delivered the expected performance.

When the economy slows and equities fall, central banks cut rates. Mechanically, bond prices rise. In 2008, the worst stockmarket year in 30 years, the S&P 500 collapsed 37%, while US Treasuries rose 14%. Here, the defensive pocket clearly did its job.

The discount rate as the ultimate arbiter

Then came Covid, followeed by the war in Ukraine. Supply chains were disrupted. Demand outstripped supply, energy prices soared, and inflation skyrocketed, making a smashing comeback. Central banks no longer cut rates to support the economy; instead, they raised them to break price increases. Some started from very far behind because they were late to intervene (the famous "transitory inflation").

Another mechanic is at work, centered around a single variable: the discount rate. For equities, a rate hike reduces the present value of future cash flows (Free Cash Flows). For bonds, it instantly devalues the existing stock of debt.

The tipping point for the 60/40 strategy was 2022. US inflation surged, exceeding 9%. The Fed had to propel its benchmark rate from 0 to over 4% in 10 months. As a result, the S&P 500 plunged 19%, while the Nasdaq 100 fared even worse, dropping 33%. However, unlike in 2008, bonds (measured by the Bloomberg US Aggregate index) sank by 13%. The 60/40 portfolio posted its worst performance in nearly a century. Technically, the correlation between equities and bonds turned positive again (+0.6) - both engines stalled at the same time.

What this means in practice

The primary virtue of what is sometimes called a "conservative" or "balanced" portfolio is that it delivers decent returns for a reduced risk profile. The assurance of holding 40% in bonds does indeed slow losses, as was the case during the last three market crashes. However, it is a double-edged protection.

Bonds, which have almost zero risk by definition have lower yields than other riskier assets. Holding a classic 60/40 means that 40% of the portfolio yields gains of 1% to 5% under optimal conditions, which significantly drags down the performance of the equity portion during growth periods.

The bond asset is sustainable in a world where inflation and rates are stable and where volatility does not rule. However, in recent years, inflationary movements have amplified after a long period during which they did not much bother economies. The famous 40% pocket is sub-optimal under such circumstances.

The expensive oil test

The surge in oil prices in early 2026 and the resulting inflationary fears have revived the specter of 2022 for the 60/40. US bonds lost approximately 2.10% in March (iShares Core US Agg Bond ETF), while the S&P 500 fell by 5%. Both assets thus moved in the same direction.

The iShares Core 60/40 ETF, which replicates this type of portfolio, posted -4.47% over the period, its worst performance since September 2022, when it dropped 7.10%. March does not seem particularly favorable for the 60/40: six years ago, March 2020 ended with the decade's worst performance, -9.45% for the 60/40 ETF.


Despite heavy losses during inflationary periods, analysts are not questioning the model. It would require average 10-year inflation to reach around 3%, a scenario that is deemed unlikely by Vanguard. The firm forecasts a generally negative correlation for the future at around -0.27, asserting that the benefits of diversification remain intact.