In this three-part series, Will de Baer, Investment Director at Casterbridge, examines the BIG Investment Breakdown and what it means for client portfolios. As the traditional balancing relationship between equities and bonds has weakened, the diversification that many portfolios rely on has been quietly eroded. Will explores why this is happening, what history tells us, and how investors can respond.
The BIG Investment Breakdown
Part 2: Why the world changed, and what it means for your portfolios
The structural forces reshaping the investment landscape and what we’re watching for
In Part 1, I set out how the relationship between equities and bonds has shifted, and what that means for portfolio diversification. The natural question is: why? What changed? And is it likely to reverse?
The short answer is that the world we’re investing in today looks fundamentally different to the one that made the 60/40 portfolio so effective for two decades. This isn’t about bonds failing. It’s about a set of powerful structural forces that have reshaped the investment backdrop, and which affect every asset class, not just fixed income.
Fiscal dynamics are playing a significant role. US government debt has risen from $8 trillion pre-financial crisis to nearly $40 trillion today
The single most important shift is the inflation regime. After roughly 25 years of low, stable inflation driven by globalisation, cheap energy, and favourable demographics, we’re now in genuinely different territory. Energy transition costs, tight labour markets, supply chain fragmentation, ageing Western populations, and persistent government spending are all feeding into a structurally higher inflation environment. In a low-inflation world, equities and bonds respond differently to economic shocks, which is what created that valuable negative correlation. In a high-inflation world, both tend to move together and that’s the environment we’re navigating now.
Alongside inflation, fiscal dynamics are playing a significant role. US government debt has risen from $8 trillion pre-financial crisis to nearly $40 trillion today, a near 400% increase in under 20 years. Interest payments alone are expected to hit $1.22 trillion in the US this year. Here in the UK, debt interest is forecast at over £100 billion. Governments are effectively caught in a loop: borrowing to spend, and increasingly borrowing just to service existing debt. A degree of inflation actually helps inflate that debt away, something no government will say openly, but the incentive is real. We call it fiscal dominance.
The gold price offers a striking illustration of this dynamic. Over the same period that US debt has ballooned, gold has risen from around $650 to over $4,600 per ounce, a rise of more than 600%. It is one of the clearest signals of eroding confidence in fiat currencies and the fiscal direction of travel.
Add to that de-dollarisation, geopolitical fragmentation, and the herding behaviour that comes with the growth of passive investing, on the worst days in markets, every asset class starts moving in the same direction, and correlation converges sharply toward one. As the infamous saying goes, ‘the only thing that rises in falling markets is Correlation’.
These forces don’t reverse overnight. But they are cyclical, not permanent. History tells us that clearly. So we watch carefully for the conditions that would signal a genuine shift: inflation credibly falling toward target, central banks with the freedom to act, geopolitical pressures easing, and fiscal dynamics stabilising. When those conditions emerge, bonds will again earn their place as a strategic portfolio anchor. We’re not there yet, but we’re watching.
In the meantime, the question isn’t whether to hold bonds at all. It’s how to complement them intelligently, and where else to look for genuine diversification. That’s what Part 3 is about.