Credit Risk for Interest Rate Risk

I gave a listen to a recent episode of the Stay Wealthy podcast. Investment manager Cullen Roche was the guest for the episode.

In the episode, (if I understand his argument correctly) Cullen suggests short-term corporate bonds for one’s fixed income portfolio. He argues that Treasury bonds are currently paying too little to merit the risks of holding them.

I agree w Cullen on the problem that buying (Treasury) bonds now means enduring interest rate risk for little in the way of investment return.

But, I can’t say I agree with him on the solution. He suggests buying lower-quality bonds. Even if the bonds are highly-rated, they’re still lower quality than U.S. Treasury bonds. And one good lesson from the financial crisis is that credit ratings are (arguably) worthless. Said another way, I wouldn’t want to trade the interest rate risk of holding Treasuries (which means theoretically losing some of your money) for the credit risk of anything that isn’t a Treasury (theoretically lose all of your money).

If anything, the solution to (Cullen’s) problem would be to go shorter, buy T-Bills, etc. The catch is that T-Bills don’t appreciate to the degree that longer-maturity Treasuries do when the market goes down (i.e. crisis alpha). But, if I had to pick an asset to pair with stocks, I’d rather an asset that doesn’t move when stocks go down (T-Bills), than an asset that does go down in value when markets do. Credit risk just doesn’t make sense for a bond portfolio – especially if that bond portfolio is paired with stocks.