"60/40 is dead” has been declared in 2009, 2013, 2016 and 2020. The 60/40 portfolio is what Americans and some Australians refer to as growth biased diversified portfolios with 70/30 more common here. Neither of them died at any of those points and regulatory pressure is having the opposite effect. Furthermore the 2022 yield reset means that government bonds now pay decent income even if their diversification benefit remains under question.  In fact 70/30 portfolios were never diversified in the general sense, they were a bet on one extended regime — disinflation with a positive real yield — that held from 1982 to 2020, the only time this has happened over a sustained period and a direct consequence of the excesses and aftermath of the ’70’s. That regime is probably over and maybe we have to learn some lessons from the rest of financial history when the 70/30 was a carry portfolio with correlated tails: income from bonds, but no reliable hedge when equities fall.

The evidence sits in the equity–bond correlation, and the point is not whether it is positive

but why? Through the 1980s and 1990s it was positive and benign: both assets rallied as inflation fell. In 1917–19, 1942–48, 1969–82 and 2022–23 it was positive and destructive: both fell as inflation rose. Growth shocks make bonds a hedge; inflation shocks make them a second equity. The 24-month correlation has only just turned negative again, and whether it stays there is the question any SAA review has to take a view on.

Two structural facts argue it may not. US federal debt is around 123% of GDP, a level last seen in 1946, when deleveraging worked through nominal growth and bondholders losing about 4% a year in real terms, not repayment. Real yields today are near zero on trailing inflation, and there is no war stock that stops growing. Meanwhile the exits have narrowed: roughly 90% of global investable assets now move with US equities, with global Treasuries and investment-grade credit crossing that line this cycle. What remains outside — gold, commodities, liquid alternatives, cash, floating rate bonds and maybe some macro products — is a short list, and each is expensive in tracking-error terms.

That is where the regulatory constraint bites. Treasury's May 2026 consultation proposed extending the performance test to platform products — up to 7,500, including some 2,700 model portfolios and SMAs — in some interpretations that involves benchmarking defensive assets to AusBond Composite and Global Aggregate hedged within a 50 basis point tolerance. If applied to a universal benchmark it will probably herd investors into duration-heavy indices (in both the growth and defensive  portfolios) and probably the asset’s most impaired in an inflationary regime. The focus on tracking error will increase while clients experience drawdowns and, in retirement, sequencing risk. Under disinflation the test is harmless. Under fiscal dominance it locks portfolios into prospective risks and funding issues. If on the other hand Investment Committees and product providers can create bespoke benchmarks (as the default MySuper industry fund options have been able to) then there will be some complex conversations to be had and decisions to be made on behalf of clients.  

Maybe ahead of client conversations might need to become more nuanced with bold statements like "your portfolio is diversified" to "your portfolio is positioned for this regime, and here is what we own for the others". For retirees, 2022 — both assets down in the same year, worse in real terms — is the failure mode this planning should aim to survive if a more fiscally dominant and inflation prone regime was to take hold. The conversation with older investors may also become more markedly different than the one we have with young accumulators, something which is being heralded by more talk of retirement products and strategies. For now this is a reason to watch bond markets especially closely, lest we look back and realise the regime changed without us seeing the wood for the trees. On the other hand bond market volatility might be being driven by oil prices and tech driven productivity gains will continue the deflationary trend, thereby letting indebted and profligate governments off the hook. Fingers crossed but in the meantime, we will try and prepare for every eventuality.