By Davide Barbuscia

NEW YORK (Reuters) – Lockstep declines in bonds and stocks are sending investors into defensive products such as credit swaps, convertibles and even cash as they seek refuge from the market’s recent gyrations.

BlackRock Inc.’s iShares iBoxx $ Corporate Bond ETF is down nearly 7% since April 2020. Its lowest point in over a year, due to persistent inflation expectations and increased interest rates.

This is consistent with the losses in major stock indexes that have been affected by Fed tightening. It has fallen 7.3% over the past year and is currently down about 11%.

Side-by-side falls have thrown another wrench in a strategy of decades that used a combination of stocks and bonds to absorb equity losses. Bond prices should move higher when stock markets are volatile.

Jordan Kahn (president and chief investment officer of ACM Funds Los Angeles) stated that “it’s extremely difficult at the moment because there are very few places where to hide.”

There are concerns about more volatility in asset markets. Expected rate hikes of 150-175 basis point over the next 12 months could further boost bond yields. This will also impact stock valuations.

The benchmark 10-year US Treasury yields, which influence borrowing costs across all credit types, have increased 50 basis points to reach their highest point since August 2019. The yields and bond prices are inverted.

“Widening spreads and volatility have certainly brought back interest to products that had been basically sleepy for the past few years,” said Alfonso Peccatiello, a former portfolio manager who now authors a financial newsletter and advises institutional investors.

Some investors have found credit swaps attractive because they are able to hedge against defaults by anticipating more volatile asset prices.

Markit CDX North American Investment Grade Index – a set of credit default Swaps used to measure credit risk – widened by over 17 base points to 64 this year. This is its highest level since September 2020.

Matt Smith is an investment director for Ruffer Investment Management in the UK. He said that while he didn’t have corporate credit, he had “quite many” credit default Swaps.

The credit market is vulnerable to rising yields or falling central bank accommodation. Credit also flows out of credit and meets an extremely liquid market. He said that it looked like the worst possible scenario.

Michael Miller, the chief investment officer and president of Wellesley Asset Management (an investment firm that specializes in convertible bond investments), said there is a growing demand for these types of instruments. These allow holders to exchange bonds to their underlying stocks.

Miller claimed that the asset class has almost always outperformed traditional fixed income instruments and U.S. equity during times of inflation over the past 50 year.

He said, “This seemingly forgotten asset class has received a lot attention all of the sudden.”

SPDR Bloomberg Convertible Securities ETF (an exchange-traded mutual fund offering exposure to U.S. securities convertibles) has seen 0.3% growth this month.

Kahn of ACM Funds increased his exposure to ETFs that move invertedly to Treasuries late last year, to hedge against higher rates and hybrid instruments related to the energy transport industry.

For times of uncertainty, he is still relying upon a traditional strategy: Cash. Since March 2020, the time when the pandemic hit markets, his cash balance has reached its highest ever level.

He stated, “Right now I believe that we are in a marketplace where only preserving capital and not seeking return on capital”