Active management and diversification the key to safety in rattled markets

BONDS

Concerns about sovereign credit risk continue to rattle the markets in the aftermath of the Greek financial crisis, resulting in troubling times for government bond investors. We think some strategies are better than others for navigating these waters.

Some investors we have spoken to are thinking of strategies such as abandoning sovereign bonds altogether and buying the highest-quality corporate bonds, or focusing only on countries with very low debt levels. But we would advise against being too hasty in jumping into the next ‘safe’ alternative. In trying to escape sovereign risk, investors can put themselves in the path of different – and potentially costly – risks. For example, corporate bond liquidity can dry up at times of market upheaval. And while low-debt countries like Norway and Sweden might have lower credit risk than other ...