Chart: The challenging risk/reward environment for bonds

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Our latest chart demonstrates that bondholders aren’t being compensated very well for investing in riskier bonds — with one exception.

In 2019 investors are generally being rewarded less for riskier bonds

 

  • Investors earn a yield premium, or spread, for assuming risk. In the current environment, the yield premium is generally lower and investors are being compensated less for investing in bonds with more risk. This is a change from the end of 2018 when yield premiums were more attractive.
  • Agency mortgage-backed securities (MBS) are a notable exception to this trend. There’s a favorable risk/ reward profile in agency MBS — the yield premium is at levels that haven’t been seen since the financial crisis. It’s important to remember that individuals can prepay their mortgages if interest rates drop materially. And portfolio managers need to consider what the market anticipates for prepayments.

 

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