Research Affiliates challenges the idea that post crisis Treasury markets entered bubble territory, arguing low yields mostly reflected weak macro fundamentals rather than irrational pricing. The paper also contends bonds remained useful portfolio hedges, noting stock and Treasury returns stayed negatively correlated for 20 years.
The Bubble That Never Came
Research Affiliates
Ashish Garg, Michele Mazzoleni
Research
9 Pages
Key Takeaways
Yield Signals Misread: Using 1961–2017 data, 10 year Treasury yields explained just 1% of excess return variation, weakening the claim that low yields automatically signal bubble conditions.
Macro Trends Matter: A model using inflation and trailing GDP growth raised adjusted R² from 56.3% to 83.4% when estimating short term Treasury rates.
Diversification Still Valuable: Treasury bond beta versus the S&P 500 turned negative after the late 1990s, supporting bonds as potential equity hedges during weaker economic periods.
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