In February 2020 the S&P 500 fell 33.9% in 33 days. Two years later it fell again, 25.4% between January and October 2022. Both were painful and roughly the same size. If you owned a balanced portfolio, they could not have felt more different.
In 2020 the bonds did their job. As stocks collapsed, the 10 year Treasury yield fell from 1.57% to 0.79% and the Bloomberg US Treasury index gained 5.4%. In 2022 the cushion turned into a second fall. The 10 year climbed from 1.63% to 3.90% by the day stocks bottomed, and the same Treasury index lost 12.7%. Stocks and bonds went down together.
One detail in that chart is worth a second look. The broad bond market, the Bloomberg US Aggregate, did not rally in 2020. It finished the drawdown slightly negative and fell 6.3% in eight trading days in March, because it holds corporate bonds and mortgages alongside Treasuries. When people say bonds hedged in 2020, they mean Treasuries. That distinction will come back.
This paper is not a recession forecast. It is about something more practical. Every hedge works in some environments and fails in others, and there is no all-weather version. So, the first question is not “how do I protect my portfolio?” It is “protect it from what?”
Start with the number itself. The 10 year Treasury yield is really two things added together. One is where the market expects short-term rates to average over the next decade, which depends on growth, inflation and what the Fed will do about both. The other is the term premium, the extra pay a lender demands for locking up money through ten years nobody can forecast. The New York Fed estimates it daily, and it stood at 0.92% on October 8.
You can also split the same yield a second way, into a real yield (what TIPS pay above inflation) and a breakeven (the inflation rate the market is pricing in). Today’s 10 year at 5.24% is a real yield of 2.90% plus a breakeven of 2.35%.
Here is why that matters. The same yield can rise or fall for completely different reasons, and the reason decides what your bonds do while stocks are falling.
In a growth scare, the market starts pricing Fed cuts, expected inflation softens, and investors run toward Treasuries. Yields fall, bond prices rise, and the bond sleeve becomes the shock absorber. In all seven growth-driven sell-offs since 2000, the 10 year breakeven fell.
In an inflation scare, the pressure runs the other way, and 2022 shows where it lands. Between January and October, the 10 year real yield rose 2.63 points while the breakeven fell 0.35. The market never lost faith that the Fed would eventually win. What it repriced was how hard the Fed would have to fight.
Inflation fear does most of its damage through the Fed’s response, not through inflation expectations themselves.
You can receive a capital gain, and a tax bill, in a year you did nothing at all, produced by decisions other investors made.
The simplest way to keep this straight is to sort sell-offs by what triggered them. The first group is driven by growth fear, the worry that demand, earnings, and jobs are about to break. The second group is driven by inflation fear, the worry that prices will not come down and the Fed will keep tightening until something gives. On a stock chart they can look identical. In the bond market they behave like opposites.
This lines up with a solid body of research. Brixton and coauthors at AQR (Journal of Portfolio Management, 2023) show that stocks and bonds react in opposite directions to growth news and in the same direction to inflation news. Their simple model explains about 70% of the long-run variation in the US stock-bond correlation, which was positive on average for most of the 20th century and negative for the two decades after 2000. They also find that the volatility of inflation, more than its level, is what pushes the correlation up.
Their simulation puts a size on it. If the stock-bond correlation moves from -0.5 to +0.5, a 60/40 portfolio’s volatility rises about 20% and its largest drawdown about 30%. Same allocation, different regime, meaningfully riskier portfolio.
Inflation fear also does not need a recession. A rate shock can knock stocks down while the economy is still growing, as it did in 1987 and again in late 2023. That is part of why “will there be a recession?” is the wrong question for a bond investor. Nine of the twelve recessions since 1948 overlapped a sell-off in this study, but only four of those sell-offs were driven by growth fear. Several recessions arrived after an inflation-driven sell-off was already under way, as the result of the Fed’s tightening rather than the cause of the fall. A recession tells you something happened. It does not tell you what your bonds did.
A framework is only useful if the record backs it up. The study covers every bear market since 1946 plus the 10% to 19.9% corrections that had a clear macro trigger, 21 episodes in all. Each is tagged by what triggered it: 10 by growth fear, 9 by inflation fear, and two, 1990 and 2025, that had real elements of both. Every episode is measured the same way, from the S&P 500’s closing high to its closing low. The two earliest episodes drop out of the yield analysis because the Fed pegged Treasury yields until 1951, which leaves 19.
If you take one picture from this paper, take this one. Read it left to right and the colors are mixed. Both kinds of sell-off cut stocks by about 28% on average. Read it top to bottom and they separate. The 10 year yield fell in all 9 growth-fear episodes, by about a point on average. It rose in all 8 inflation-fear episodes, by about 1.1 points on average. The question that matters for a balanced portfolio is not how far stocks fall. It is which side of that zero line you are on.
Two caveats keep this honest. First, the separation is clean but not wide. The smallest inflation-fear rise, 1987 at +0.24, sits just above the smallest growth-fear decline, 1961-62 at -0.09. Second, the tags are judgment calls about the trigger, made with the benefit of hindsight. Inflation is the more independent check, and it tells the two groups apart almost as well. At the market bottom, CPI inflation averaged 1.5% in the growth-fear episodes and 5.75% in the inflation-fear episodes.
The averages also hide a difference in shape. The typical inflation-fear-based sell-off was deeper, a median decline of about 26% against about 20% for growth fear. It was also slower, as 1968-70 lasted 543 days and 1973-74 lasted 630. Growth scares carry the fatter tail, with 2000-02 and 2007-09 the two worst declines in the study, and they can be brutally fast. The 2020 decline took 33 days.
The historical record tells the same story. From the mid-1960s through the late 1980s, investors were primarily worried about inflation. From roughly 1998 through 2020, concerns shifted toward growth and recession risks. Then 2022 brought inflation back. That pattern lines up closely with the shifts in stock-bond correlation documented by AQR and helps explain why an entire generation of investors came to view bonds as a reliable hedge against equities. For more than two decades, that belief was largely reinforced by experience.
One signal you might expect to help barely does. Unemployment averaged 5.7% going into the growth-fear sell-offs and 4.7% going into the inflation-fear ones, and it rose by roughly half a point in both. It lags. The worst job losses usually arrive after stocks bottom: 14.8% in April 2020, a month after the low, and 10.0% in October 2009, seven months after. The labor market confirms what direction the economy has been headed. In the moment, it does a poor job of telling you which kind of sell-off you are in.
Here the record says something the usual version of this story misses. “Bonds fall with stocks in an inflation scare” is mostly a 2022 story. Yields rose in every inflation-driven sell-off, but bond investors were not always worse off, because bonds pay income while you wait.
Treasuries made money in five of the eight inflation-fear sell-offs, roughly broke even in 1968-70, and lost meaningfully only in 2022 and 2023. The reason is the coupon. A rough way to see it is to divide the yield by the bond’s duration. That gives you about how far yields can rise in a year before a 10 year Treasury loses money. In January 2022, with the 10 year at 1.63%, that cushion was about 0.18 points. Yields rose more than twelve times that. In late 1980 the cushion was above 2 points, so a rise of 0.83 barely dented the return.
2023 shows the other way the cushion fails. The 10 year started near 4%, but it jumped 0.88 points in less than three months, far more than three months of coupon could cover. The cushion is a rate per year, not a shield. Speed matters as much as size.
So, the accurate claim is narrower than the one most people make. In an inflation scare, bonds stop hedging. They lose money only when the yield rise outruns the coupon, which happens when starting yields are low or the rise comes fast. Today’s cushion, about 0.68 points with the 10 year at 5.24%, is nearly four times what investors had going into 2022.
In an inflation scare, bonds stop hedging. They only lose money when the yield rise outruns the coupon.
If bonds are not the all-weather hedge that many investors think they are, the obvious question becomes: what is? The reality is that there isn’t one. To test it, I looked at what a dozen common instruments did in the 14 sell-offs since 1980 where Bloomberg has the index history.
Directional patterns from the episodes shown above, not forecasts. Counts refer to sell-offs with available index data.
A few patterns stand out. The first is that liquidity is its own risk. In March 2020, municipal bonds, investment-grade corporates and even gold fell for a few weeks while only Treasuries and cash held up. That matters for families who own municipal bonds for the tax-exempt income. It is not a reason to avoid them. It is a reason to know what they protect against and what they do not.
The second is that speed matters. Puts and long Treasuries did their best work in fast crashes. Trend following needed time to see the trend, which is why it shone in the long grinds of 2000-02, 2007-09 and 2022 and did little in the short ones. Put protection also has a real cost. Since September 1989 the Cboe put-protection index has compounded at about 7.6% a year against 11.0% for the S&P 500 with dividends reinvested, a gap of roughly 3.3 points a year. That is the premium for insurance you hope never to use.
The last is that inflation hedges are narrow. TIPS hedge inflation, not the Fed. Commodities hedge supply shocks, not for when demand collapses. AQR’s Fire and Ice research reaches a similar place from a different angle, finding TIPS show almost no sensitivity to inflation surprises once growth is accounted for, while commodities show some of the strongest.
Put together, the practical conclusion is simple to say and harder to practice. Before choosing a hedge, decide which outcome you are trying to protect against. Then pick the instrument built for that outcome, while understanding that it will disappoint you in a different one.
Most families do not have just one worry, and the right mix depends on whose money it is. A founder with most of her wealth in a single stock fears something very different from a retired couple drawing income from their portfolio. That is why this is a conversation and not a product. Every hedge also carries a cost, whether it is yield given up, premium paid, or return that never shows up in the good years. The right amount of protection is the amount that lets you stay invested through the outcome you fear most.
Both fears are live. On September 16 the Fed raised its target range a quarter point to 3.75%-4.00%, its first hike in three years. August CPI was up 3.4% from a year earlier, with energy up 16.3%. Then the September jobs report showed just 29,000 jobs added and unemployment ticking up to 4.2%.
The bond market has noticed. The 10 year rose from 4.48% on July 1 to 5.24% on October 9. The real yield did most of the work, up 0.66 points, while the breakeven rose only 0.12. The New York Fed’s term premium estimate climbed from 0.51% at the end of June to 0.92%. Meanwhile, the S&P 500 set a record close on October 6.
Source: Bloomberg (USGG10YR, USGGT10Y, USGGBE10, ACMTP10, SPX) as of 10/9/2026; Federal Reserve FOMC statement, 9/16/2026; BLS CPI release, 9/11/2026; BLS Employment Situation, 10/2/2026.
If a sell-off started tomorrow, most of these readings point toward the inflation-fear profile, the one where bonds do not hedge. The difference from 2022 is the starting point. With the 10 year above 5%, coupon income can absorb a much larger rise before a Treasury loses money. The swing factor is the labor market. If cooling turns into breaking, the regime can flip and duration goes back to being a hedge. That is how 1973-74 and 1980-82 ended, with the Fed tightening until something broke and yields finally rolling over.
The 2025 tariff sell-off is a reminder that real-time reads are probabilities. It carried both fears at once. The 10 year fell sharply into early April, then jumped about half a point in the days around the market’s low. None of this is a forecast. It is a description of which way each outcome would push the bond side of a portfolio.
Back to where this started. In 2020 and 2022 stocks fell by similar amounts. In one, Treasuries caught the portfolio. In the other, they fell right alongside it. That was not bad luck. It was the difference between a growth scare and an inflation scare, made worse by starting yields that left almost no cushion.
Every sell-off in this study was eventually followed by a recovery. The point of thinking this way is not to get you out of the market. It is to make staying in easier, by owning protection that fits the risk you actually care about rather than assuming one asset will always play that role.
Watching for a recession tells you something happened. Asking what you are afraid of tells you what to own.
If this raises questions about how your portfolio is positioned for either kind of sell-off, that is exactly the conversation to have with your advisor. That is what we are here for.
The study includes every S&P 500 decline of 20% or more since 1946, plus declines of 10% to 19.9% with a clear macro trigger. Other corrections of 10% or more, including 1976-78, early 1980, 1983-84 and February 2018, are not included. Episodes are measured from the S&P 500 closing high to the closing low (price index, Bloomberg SPX). Growth-fear, inflation-fear and mixed tags reflect our judgment of what triggered each sell-off. 10 yr yields are Bloomberg USGG10YR (daily, from 1962) and Shiller monthly data before 1962; 1946-47 and 1948-49 are excluded from yield statistics because Treasury yields were pegged until the 1951 Treasury-Fed Accord. Total returns are Bloomberg indices: US Treasury Bills 1-3 Month (LD12TRUU), US Long Treasury (LUTLTRUU), US Treasury (LUATTRUU), US Aggregate (LBUSTRUU), US TIPS (LBUTTRUU), Municipal Bond (LMBITR), US Corporate (LUACTRUU), US Corporate High Yield (LF98TRUU), gold spot (XAU), Bloomberg Commodity Total Return (BCOMTR), DB Cross Asset CTA Trend (DBCAUCTA), Cboe S&P 500 5% Put Protection (PPUT) and S&P 500 Low Volatility Total Return (SP5LVIT). The put-protection cost compares PPUT with the S&P 500 Total Return index (SPXT), 9/11/1989 to 10/8/2026. Some bond index histories are month-end only before 1993, so early episode returns use the nearest month-end. Pre-1973 Treasury returns are estimates for a constant-maturity 10 yr par bond priced off monthly yields. The cushion measure divides the 10 yr yield by the modified duration of a 10 yr par bond and ignores rolldown and convexity. Unemployment is BLS UNRATE via FRED; CPI is CPI-U year over year.
This material is provided by 1900 Wealth Management, LLC for informational and educational purposes only and represents the views and opinions of the author as of the date of publication. It does not constitute investment, legal, or tax advice, nor an offer or solicitation to buy or sell any security or to adopt any investment strategy. Statements regarding future economic conditions, interest rates, inflation, and monetary policy are inherently uncertain and subject to change; actual results may differ materially. References to third-party research, including simulated portfolio statistics, reflect the authors’ models and assumptions, have inherent limitations, and do not represent actual trading. Index and market data are shown gross of fees and do not reflect the deduction of advisory fees, transaction costs, or other expenses, which would reduce returns; indices are unmanaged and cannot be invested in directly. Rules-based benchmark indices such as trend-following and put-protection indices are not investable products. Past performance is not indicative of, and does not guarantee, future results. All investing involves risk, including the possible loss of principal. Data sourced from Bloomberg, the Federal Reserve, the Federal Reserve Bank of New York, the U.S. Bureau of Labor Statistics, FRED, Robert Shiller, and AQR Capital Management as of October 9, 2026 unless otherwise noted. Please consult your 1900 Wealth advisor before making any investment decision.
For informational purposes only. Not investment advice. See disclosures.
Charles supports portfolio management and trading across a wide range of asset classes at 1900 Wealth Management. His responsibilities include trade execution, portfolio reviews, manager due diligence, and assisting with investment strategies for both 1900 Wealth Management and Jefferson Bank Trust clients.
Before joining the firm, Charles served as a Research Analyst and Portfolio Manager at Miura Group, where he led macroeconomic research and contributed to portfolio development and strategy. His background also includes asset management and pricing analytics. Charles holds an MBA and a Bachelor of Science in Business Administration in Finance from Robert Morris University.
