S&P 500 Sinks, TLT Cracks: The Hedge Isn't Hedging Anymore — Where's The New Safe Haven?

The go-to safety net of the market is breaking apart—and quickly.

In March, the S&P 500 has been under pressure at the same time that bond yields are spiking, causing prices of long-duration U.S. bonds to drop. The index is down more than 3% so far this month. Meanwhile, the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), an ETF that is commonly used as a hedge against declines in the stock market, also fell in tandem with the market—challenging the most well-known relationship in portfolio construction.

What's causing this problem is the rapid rise in bond yields. The 2-year U.S. Treasury note has increased by 33 basis points this month, the largest move since October 2024.

The 60/40 Problem, Playing Out In Real Time

Investors have long used bonds as a hedge against the ups and downs of the stock market. But that strategy is no longer working.

Core bond ETFs such as the Vanguard Total Bond Market ETF (NASDAQ:BND) and the iShares Core US Aggregate Bond ETF (NYSE:AGG) are also falling with the stock market, providing little respite on the downside. Instead of acting as ballast, bonds are becoming a source of stress.

But even shifting to credit is not helping. Corporate bond funds such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD) and high-yield bond funds such as the SPDR Bloomberg High Yield Bond ETF (NYSE:JNK) are behaving more like equities, falling as risk sentiment weakens.

Where Investors May Need To Look Instead

With traditional hedges failing, investors may need to rethink what "defensive" exposure looks like in a higher-inflation, rising-yield environment.

Funds with short durations, such as the Schwab Short-Term U.S. Treasury ETF (NYSE:SCHO) or the Vanguard Short Term Bond ETF (NYSE:BSV), could potentially offer greater stability given their relatively low sensitivity to interest rate movements.

Inflation-linked securities are another category that could be considered. ETFs such as the iShares TIPS Bond ETF (NYSE:TIP) and the Vanguard Short Term Inflation-Protected Securities ETF (NASDAQ:VTIP) are designed to adjust with inflation, making them potentially more resilient than traditional bonds.

Commodities are another sector that could potentially play a role in such a scenario. Broad-based ETFs such as the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (NASDAQ:PDBC) or the Invesco DB Commodity Index Tracking Fund (NYSE:DBC), as well as energy sector ETFs such as the Energy Select Sector SPDR Fund (NYSE:XLE), could potentially offer exposure to sectors that are likely to perform better in an inflation scenario.

Alternative investments such as the Simplify Managed Futures Strategy ETF (NYSE:CTA) could also be on the radar, given their potential for going both long and short across asset classes in volatile markets.

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