Welcome to Thoughts in the Market.

I'm Andrew Sheetz, Chief Cross-Asset Strategist for Morgan Stanley.

Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends

across the global investment landscape and how we put those ideas together.

It's Friday, April 9th at 2PM in London.

Over the last year, bonds have been pretty disappointing assets.

The total returns for bonds of all stripes, from US treasuries to investment-grade corporate

bonds to mortgages are negative, underperforming cash and really underperforming a roaring stock

market.

This disappointment has been global, with bonds from the UK to Germany to Brazil also

losing value over the period.

Bonds haven't just had poor returns, their day-to-day moves have also become more correlated

with the stock market.

And both dynamics seem to undermine the idea that bonds provide portfolio diversification.

Indeed, we commonly feel questions about whether bonds can still be portfolio diversifiers.

I think they can.

The first reason, as I think investors, even very sophisticated ones, fail to appreciate

where the diversification from bonds really comes from.

Too much emphasis is placed on whether bonds will zig while the rest of the market zags,

and too little on the fact that bonds are simply a much less volatile asset.

Relative to holding a portfolio of 100 percent equities, a balanced portfolio of 60 percent

stocks and 40 percent bonds will have about half as much volatility.

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