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.