I agree with the notion that there is insufficient (often zero) risk premium for corporate bonds. However, the risks that I'd want a premium for include tail risks which don't really show up in volatility measures. You won't notice the difference in practice unless there is a low-probability high-impact event and then you will. Sort of like driving a car with airbags vs an identical car without them.Broadly speaking, the argument is that the default risk premium is not sufficiently compensated. Also, during some market crises (e.g. 2008), these bonds perform much worse than treasuries, and those are just the times where you want resiliency out of your fixed income.
My take is that this is true, but not a huge difference in practice. In theory, if your goal was to use bonds to reduce portfolio volatility....
I also disagree with the notion that corporate bonds (any of them) have risk profiles equivalent or similar to treasuries. Someone pointed out that Microsoft bonds are rated AAA while treasuries are only AA+. That's just rating agency posturing and silliness--just remember how they rated mortgage-backed securites in 2006. And of course, not all corporations are Microsoft.
Statistics: Posted by bd7 — Mon Sep 09, 2024 5:50 pm — Replies 11 — Views 1775