Taking Control of Your Bond Market Risk

Rising interest rates. Stretched valuations. Populist politics. These are some of the challenges bond investors face today. They’re also reminders of why it’s so important to manage interest-rate and credit risk in an integrated way.

Too often, investors separate rate-sensitive securities (global government bonds, inflation-linked bonds) and growth-sensitive credit ones (high-yield corporate bonds, emerging-market debt) into distinct groupings—and then look to different managers to oversee each one.

In theory, the divide-and-conquer approach works like this: if the assets in the credit-oriented portfolio get too expensive to justify the risk, a manager might sell some of them and shift those assets into the rate-sensitive portfolio. But managing these pools of assets separately can cause investors to miss income-generating opportunities and take on too much exposure to a single risk.


In our view, a “combine-and-conquer” approach is better. Pairing the two groups of assets in a single strategy known as a credit barbell can minimize large drawdowns while still providing a strong and steady stream of income.

Credit barbells blend asset classes whose returns are usually negatively correlated (Display); rate-sensitive government bonds—known as risk-mitigating assets—tend to do well when growth slows, while return-seeking credit assets such as high-yield corporates shine when growth accelerates and interest rates rise.

Managing these assets holistically lets investors capitalize on the critically important interplay between prevailing interest-rate and credit cycles by rebalancing the portfolio as conditions and valuations change.