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Bond Investors Trade One Risk for Another 

July 23, 2015

Richard Barley, Wall Street Journal

Europe’s investors have been sharply reminded this year that bond markets can be risky. For some fund managers, the counter-intuitive response to that is to buy riskier bonds.

Of course, it all depends on what type of risk you’re concerned about. The big upset this year has been in bonds commonly regarded as “risk-free”: European government bonds. After a relentless rally, yields reversed course sharply in the second quarter, with 10-year German Bund yields standing at 0.69% now versus a low of 0.05%.

Prices fell particularly for long-dated bonds with low coupons: that combination gives them high duration, meaning prices move more for any change in yield than for bonds with shorter maturities or higher coupons. Essentially, they come with a form of built-in leverage, juicing returns when bonds rally, but inflicting greater pain in a selloff. With the U.S. Federal Reserve perhaps on its way to raising rates later this year, interest-rate risk has moved into sharp focus.

Read more: Wall Street Journal

 
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