Everybody’s in the same position, “I need 5 percent, I need 10 percent, how do I get there? What’s the least risky way to get there?
While yields have plunged, the need for gains hasn’t. Many pensions have maintained annual return targets of about 8 percent, and retirees still want interest on their investments to cover their day-to-day expenses.
To attain that 10 percent return goal using cash bonds, investors need to boost leverage on their high-yield investments to 2.3 times their value, They’d have to leverage Treasuries 8.1 times to achieve the same result.
Junk bonds end up a safer bet because, given those relative levels of borrowing, investors would only lose 9 percent on the securities in a scenario where they post their worst monthly returns since 2011. The damage for Treasuries would be 13.6 percent.
High yield is less risky than Treasuries.