Fixed Income Chart

Want to Reduce Downside Risk? A Barbell Strategy May Help

02 July 2019
1 min read
Credit Barbell: A History of Solid Income and Shallow Drawdowns
Credit Barbell: A History of Solid Income and Shallow Drawdowns

As of May 31, 2019
Past performance does not guarantee future results.
YTW = yield to worst
Any benchmark or index cited herein is for comparison purposes only. An investor generally cannot invest in an index. The unmanaged index does not reflect fees and expenses associated with the active management of an AllianceBernstein (AB) portfolio. US Aggregate is represented by Bloomberg Barclays US Aggregate Bond; US
Treasury by
Bloomberg Barclays US Treasury; global credit barbell is a hypothetical risk-weighted portfolio made up of 65% Bloomberg Barclays US Treasury and 35% Bloomberg
Barclays Global High-Yield; US high yield by Bloomberg Barclays US Corporate High-Yield. *Number of months it took to surpass the prior peak following the trough of the maximum drawdown period.
Source: Bloomberg Barclays, Morningstar Direct and AllianceBernstein (AB)

Investors typically try to limit their downside risk in the late stages of the credit cycle. We think a credit barbell strategy can help.

Credit barbells can minimize risk while still delivering solid income because they pair growth-oriented credit assets with US Treasuries and other interest-rate-sensitive securities. The approach is designed to help investors avoid leaning too far in either direction—and overexposing themselves to a single risk.

As the Display illustrates, a generic barbell—composed of 65% US Treasuries and 35% global high-yield bonds—has had meaningfully shallower drawdowns than a high-yield-only allocation over the past two decades.

This result is largely because the interest-rate exposure—or duration—that US Treasuries provide can dampen risk when growth slows, while still providing decent returns. Through May 31, barbell investors would have received nearly 80% of the return that high-yield bonds offered—as measured by YTW—with considerably smaller drawdowns.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.