Given historically low yields, bonds are losing their ability to effectively hedge against a large equity market fall. In a standard 50/50 equity/bond portfolio, US 10-year yields would need to go negative to compensate for a 20% decline in stocks. Hence, the Speaker has been looking for new ways to hedge his book in a global risk-off.

The Speaker recommends buying the Consumer Staples sector (XLP) while shorting Consumer Discretionary (XLY). The relative performance is at a historical extreme and each market blowup or recession (1990, 1994, 2000, 2007) has seen a sharp recovery in the ratio. The relative performance has been in an upward trend since July 2018 and in the fourth quarter of 2018, this trade combination rallied 24 percent.

The Speaker sees this as his new bond proxy. The dividend yield on XLP is 1.25 percent higher than XLY. The US 10-year currently yields 1.6 percent.

Source: Bloomberg

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