Over the last 30 years there have been three times in which the Fed entered an extended period of loose, accommodative monetary policy in order to help ease the economy through a recession. In all three cases bonds performed admirably well. As rates fell, bond values increased, helping offset losses associated with the equity markets. If the standard, balanced portfolio contained 60% in equities and 40% in fixed income, that 40% allocation to bonds was vindicated.
Source: U.S. Treasury, Zephyr StyleADVISOR
The previous three recessions started with the Federal Fund rate over 5%. In each case the Fed was able to cut over 500 basis points from short-term lending in order to help boost the economy during a recession. The Barclays Aggregate U.S. Bond Index performed quite well during these periods, providing positive returns that offset losses in the equity markets.
Were a recession to start today with short-term rates in the 1.75%-2.00% range, the Federal Reserve would have much less scope to implement a loose monetary policy. They might push rates back to 0.00%, but the gains to bonds will likely be less due to the lower starting point. With less of a value increase, the protection role of bonds is much weaker than before.