Glidepath Resilience Through Stock and Bond Correlation Regimes

Executive summary

How stock and bond correlations shape target date glidepaths

Stock and bond correlations have historically played a central role in the construction of target date glidepaths, helping balance risk and provide diversification across market cycles. From 2006 through 2020, correlations were largely negative, allowing bonds to act as a stabilizer when equities declined. Earlier periods, particularly before 1997, were marked by more frequent positive correlations driven by inflation volatility and financial stress. The low‑inflation environment from the late 1990s through 2021 supported diversification and reinforced traditional glidepath assumptions.

That relationship changed sharply in 2022 when inflation surged and the Federal Reserve initiated an aggressive rate‑hiking cycle. Stocks and bonds declined simultaneously, and correlations turned decisively positive. Core bond portfolios, benchmarked to the Bloomberg U.S. Aggregate Bond Index, posted double‑digit losses alongside equity market declines, undermining their role as portfolio ballast. These losses disproportionately affected post‑retirement target date vintages, which maintain higher exposures to bonds and rely on stability and income. As a result, the median target date retirement fund remained below its inflation‑adjusted value from 2021 through 2025.

Rethinking bond diversification and rising interest rate risk in glidepaths

The challenges were compounded by long‑term structural changes within the core bond universe. The duration of the Bloomberg U.S. Aggregate Bond Index increased significantly between 2008 and 2021 and remains elevated, leaving investors more exposed to interest rate risk at a time when rate volatility has increased. Glidepaths, however, largely retained the same bond allocations designed for a falling‑rate environment, intensifying drawdowns when rates rose.

Addressing these challenges requires a more nuanced approach to bond diversification within target date portfolios: one that emphasizes lower duration, fewer drawdowns, and more resilient income generation. Allspring’s U.S. Short‑Term High Income strategy seeks out this approach by investing in short‑maturity, non‑investment‑grade corporate debt while avoiding the lowest‑quality segments of the leveraged finance market.

Short‑term high income bonds as a tool for glidepath resilience

Incorporating a modest allocation to short‑term high income strategies alongside core bond exposure may help reduce interest rate sensitivity, improve income generation, and enhance overall glidepath resilience. As stock–bond relationships and bond benchmark characteristics evolve, target date glidepaths must adapt to better support investors in a wider range of market environments.

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Allspring U.S. Short‑Term High Income strategy investment objective: The strategy pursues strong absolute and risk-adjusted performance through all market environments. The team selects shorter-dated issues from companies with ample asset coverage and strong free cash flow, targeting a BB average credit quality. 

STRATEGY RISKS 

Market risk: Security markets are volatile and may decline significantly in response to adverse issuer, regulatory, political, or economic developments with different sectors of the market and different security types reacting differently to such developments. 
Debt securities risk: Debt securities are subject to both credit and interest rate risk. Credit risk is the possibility that the issuer or guarantor of a debt security may be unable, or perceived to be unable or unwilling, to pay interest or repay principal when they become due, and credit risk increases as an issuer’s credit quality or financial strength declines. Interest rate risk is the possibility that interest rates will change over time such that when interest rates rise, the value of debt securities tends to fall and the longer the terms of the debt securities held the greater the impact of this risk. 
High yield risk: If a strategy invests in high yield securities (commonly known as junk bonds), these securities are considered speculative and have a much greater risk of default or of not returning principal and their values tend to be more volatile than higher-rated securities with similar maturities. 
Foreign securities risk: If a strategy invests in the securities of non-U.S. issuers, these investments may be subject to lower liquidity, greater price volatility, and risks related to adverse political, regulatory, market, or economic developments and may be affected by changes in foreign currency exchange rates. 

Investors should know that this strategy deployed may be subject to additional investment risks. For important information about the investment manager, please refer to the investment manager’s Form ADV Part 2, which is available upon request.

Diversification does not ensure or guarantee better performance and cannot eliminate the risk of investment losses.

All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics.

This marketing communication is for professional/institutional and qualified clients/investors only. Not for retail use. Recipients who do not wish to be treated as professional/institutional or qualified clients/investors should notify their Allspring contact immediately.

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