Risky Bonds Aren’t So Risky in the Long Run
High-yield debt offers a stingy premium to US Treasuries at a time when the economy is shaky. But that’s not the only thing to consider.
Measure what matters.
Photographer: Christopher Goodney/Bloomberg
The world is a risky place, and high-yield debt spreads to safe US Treasury securities are close to historic levels of stinginess, signaling complacency in markets — at least on the surface. But legendary investor Howard Marks says that’s the wrong way to look at it and long-term investors should consider allocations to credit.
I am quite sympathetic to the handwringing about the policy environment. Investors are trying to absorb a bizarre — some might say stagflationary — mix of economic ideas from President Donald Trump, including 19th-century style tariffs and Silicon Valley “move fast and break things”-style government downsizing and layoffs. The former could provide a supply-side shock to prices at the same time that real economic growth may be wobbling. Consumers, businesses and investors don’t know what to think, and that uncertainty is serving as a drag on the economy.