Want to Reduce Downside Risk? A Barbell Strategy May Help

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.