Bond Investing

Managing the various risks of bond investing is paramount to our overall fixed income strategy.  There are three major risks associated with bond investing.

  1. The first risk is the interest rate risk.  For example, longer term debt securities (higher duration) generally carry a greater risk than short term debt (low duration) securities.  As interest rates go up, the longer dated bond will generally go down in price more than shorter term securities.  Likewise, as interest rates decline, longer term securities will generally go up more in price than shorter term securities.  Managing the duration of a bond portfolio reflects its overall return.
  2. The second major risk is the default risk.  The least default risk is associated with U.S. Treasury obligations and the highest default risk would be with high yield corporate bonds, often referred to as junk bonds.  Managing the default risk requires credit knowledge and diversification of credit risk.
  3. The third major risk is what is called the "spread" risk.  That is the risk associated with the interest rate differential between U.S. Treasury securities and the corresponding corporate yield.