Questions: "Wilfred, under what circumstances would bonds and equities drop together?"
Answer: High yield bonds or also known as junk bonds are positively correlated with equities.
Here is the 5 years correlation matrix of the various asset classes based on monthly returns on SGD:
Click on image to enlarge
The Bloomberg Barclays Global High Yield and Citi Global Emerging Markets US Dollar Government Bond are positively correlated with every other asset classes including equities.
On the other hand, the Bloomberg Barclays US Corporate Investment Grade and Citi World Government Bond are negatively correlated with equities.
One possible explanation is because when there is fear in the stock market, there tend to be fight towards safety such as government bonds and investment grade corporate bonds. Junk bonds and emerging market bonds are viewed as too risky to fly to.
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JNK & EMB are considered risk assets, similar to equities. For mainstream average investors, there’s no need to include JNK or EMB into your long-term core portfolio. Better to focus on large cap equities for your growth/risky allocation.
The only time it makes sense to include these 2 asset classes significantly in a portfolio is when you’re operating for high yields, and where JNK & EMB essentially replaces equities as your risk allocation of the portfolio.
However, today is not the right time to be invested in JNK especially, due to compressed yields, basically you’re not being rewarded for the risks. EMB is also not really attractive now.
Of course, if you’re a market timer & momentum trader, then anything can also be good. As long as you can catch the downturns & upturns in a timely AND cost-effective manner.