The recent rise in Treasury yields has received a lot of press lately, specifically on the impact on tech and other growth stocks. While this is important, I would argue that growth stocks were due for a sell off and the rise in yields at this point is just an excuse. Even more important is what this means for the 60/40 equity:fixed income portfolio, or, in other words, bonds as a portfolio hedge.  

Historically, many investors have used bonds to hedge portfolio risks. When interest rates are declining, which they have been for many cycles over the last 30 years, bonds and stocks are both vehicles that have added value to investor portfolios. In a rising rate environment, bonds could  lose money, which makes it extremely hard, if not impossible, for many investors not seeking current income to own bonds as a permanent part of a portfolio. Add in the fact that the stock market has been a bit wobbly as of late and you have a big problem—either keep bonds and be ok with the losses or have 100% stocks and be ok with that volatility. Neither scenario makes much investment sense. A better approach is to have an alternate form of tail risk in your portfolio that is less susceptible to interest rates and thus affords investors the opportunities to make money when the market is going up (independent of interest rates) and will  make money when the market goes down.

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