Investors are being urged to rethink their traditional approach to portfolio protection, with a leading strategist suggesting that long-dated U.S. Treasurys are losing their effectiveness due to rising yields. Julian Howard, chief multi-asset investment strategist at GAM Investments, advised a "careful" consideration of diversification strategies heading into the final quarter of 2026.
Howard explained to CNBC's "Squawk Box Europe" that GAM has been capitalizing on the long equity rally by bolstering the defensive elements of its portfolios. "Other diversifiers are available beyond U.S. Treasurys," he stated, highlighting four key alternatives: shorter-dated Treasury bills, gold, insurance-linked securities, and mortgage-backed securities.
"Whatever your view on the rally is, you have to make sure the rest of your portfolio, in a multi-asset context, is going to be robust," Howard emphasized. "U.S. Treasurys are probably not going to be the ideal offset — They're long duration, yields are going up, there's a lot of momentum there."
He elaborated on the appeal of short-dated Treasurys, noting that investors can secure a "nice 4% risk-free, duration-free" return. "That's quite a nice diversifier — it's going to work if something goes wrong in the market." As of early Tuesday, the yield on 2-year U.S. Treasurys was up 1 basis point to 4.937%, while 6-month U.S. Treasury bills saw a 2 basis point increase to 4.446%, and 3-month T-bill yields rose 2 basis points to 4.224%.
Howard also favors gold and insurance-linked securities, such as catastrophe bonds, for their "good yield" and diversification benefits. Mortgage-backed securities are another option, being less sensitive to Treasury market fluctuations.
Despite these shifts, Howard remains constructive on equities, advising investors not to be "massively overweight" heading into the year-end but also not to abandon a market with "serious momentum." The diminished reliability of the traditional negative correlation between equities and bonds, driven by supply shocks, inflation, and market volatility, underpins this search for alternative diversifiers.
This sentiment is echoed by other industry professionals. Earlier this month, Fabio Osta of BlackRock noted that markets are "moving away" from the 60/40 portfolio mix, with private markets offering new growth opportunities, particularly fueled by AI.
Image: U.S. 6-Month Treasury Bills (Illustrative)
