Carlyle’s Bansal Says Bonds Shed Role as Stocks’ Shock Absorber

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(Bloomberg) — Carlyle Group Inc.’s asset-backed finance chief said traditional fixed income is losing its reliability as a portfolio shock absorber because those investments are becoming increasingly correlated with stocks.

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“That diversification benefit that fixed income is supposed to provide, that doesn’t seem to be playing out,” Carlyle’s Akhil Bansal said Monday in a Bloomberg Television interview.

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The math tells the story, Bansal said: From 2010 to 2020, the correlation between public fixed income and equities was 0.13. That’s an indicator that those investments would tend to move in opposite directions, supporting the idea of bonds and stocks as complementary portfolio choices. But from 2020 to today, “it’s closer to 0.63,” Bansal said.

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“That higher correlation, we think, is a structural change,” said Bansal, who also published a blog post on his findings.

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Bansal attributed the breakdown to quickening inflation. Rising prices simultaneously punish both equities and public fixed income investments, he said, eliminating the diversification benefit that underpinned the classic 60/40 portfolio construction for decades. Citing his recent research, he said he wasn’t advocating a replacement of fixed income but was intended to identify assets capable of generating yield and stability with lower correlation to corporate earnings.

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“What we talk in the paper is how private ABF is not looking to replace fixed income, but play that role of generating that yield, that diversification that historically public fixed income has played,” he said.

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Bansal also flagged a second concern: concentration risk in the corporate bond market, where he said investors will find their portfolios mirror the same technology-heavy composition as the S&P 500 Index. Companies such as Alphabet Inc. and Meta Platforms Inc. tend to be categorized under communications or consumer cyclical buckets rather than technology, masking the true exposure to the AI and data-center boom, Bansal said. 

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Carlyle’s credit unit accounts for approximately 44% of managed assets at the Washington-based firm, according to its annual filing earlier this year.

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While some investors have pushed back against a so-called circular trade in AI infrastructure, which chipmakers such as Nvidia Inc. offering support for their customers, Bansal pushed back against lumping all AI-related ABF investments into one bucket. Chip financing and data-center deals are ultimately supported by cash flows and leases from investment-grade counterparties, he said.

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“When you look at Carlyle, some of the things we’re doing is we don’t look at AI monolithically, we think about diversification,” Bansal said. He identified energy and natural gas investments as Carlyle’s differentiated ABF focus within the AI ecosystem.

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(This story was produced with the assistance of Bloomberg Automation.)

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