• We made an important portfolio change this week that affects a portion of our fixed income investments.
• For many years, about 20% of our bond allocation has been invested in high yield corporate bonds.
• High yield bonds are loans to companies that are considered riskier borrowers, so they pay a higher interest rate to investors.
• Normally, investors demand a significantly higher interest rate to lend money to these companies compared to lending to the U.S. government.
• The difference between those two interest rates is called the credit spread.
• When credit spreads are wide, investors are demanding more compensation for taking additional risk.
• When credit spreads become very narrow, it usually means investors are becoming overly optimistic and are no longer demanding enough compensation for that risk.
• Right now, credit spreads are near historic lows.
• In other words, investors are acting as if high yield corporate bonds are almost as safe as U.S. Treasury bonds.
• Historically, periods of extremely tight spreads have often occurred near market peaks.
• If economic conditions weaken or recession fears rise, those spreads can widen quickly.
• When spreads widen, the prices of high yield bonds can fall significantly.
• In past environments, high yield bonds have declined 30% or more when spreads moved sharply higher.
• Because spreads are so compressed today, the risk-reward tradeoff no longer looks attractive to us.
• As a result, we have decided to move out of high yield bonds across our client portfolios.
• Instead, we are reallocating that portion of the portfolio into shorter-term investment-grade corporate bonds.
• These bonds are issued by stronger companies and have shorter maturity dates.
• Shorter maturities reduce risk because investors get their principal back sooner.
• Importantly, the interest rates available in these shorter-term bonds are currently similar to what high yield bonds are paying.
• That means we can potentially maintain a comparable yield while taking significantly less risk.
• We made this change proactively because we believe the current environment reflects excessive optimism in the high yield market.
• When everyone is comfortable with risk, that is often the time to reduce exposure.
• The trades have already been executed for client portfolios.
• Due to regulations surrounding front-running and insider trading, we must communicate these moves after they occur.
• We do not expect this change to create significant tax consequences for most clients.
• Historically, the majority of the return from high yield bonds has come from the interest payments rather than large price gains.
• Our goal with this move is to maintain income while lowering portfolio risk.
• As always, we are continuously evaluating market conditions and making adjustments when we believe the risk-reward balance changes.

We appreciate your trust and will continue to keep you informed whenever meaningful portfolio changes occur.

Transcript:

Hello everyone, and welcome to our Market Alert Video for today with March 6, 2026 and this episode, we have important portfolio change information for you. We made a big move, and we’re going to get into it, and we’re going to have more fun than a human beings should be allowed to have when talking about credit spreads, high yield bond yields, 10 year treasuries, oh my gosh, how boring can be? Can that get? Well, we’re going to make it so interesting, so informative and so much fun for you that you’re actually going to dazzle your friends with your knowledge of how those things work. And so let me bring Jordan roach in the conversation with us, our Chief Investment Officer. So Jordan, where are you? There we are. Hey, Jordan, good to see you. Now, before we get going, everybody may be wondering why I am not appropriately uniform today. I’m actually in Palmetto bluffs, Hilton Head Island. And the reason why I’m here is because we’re having a there’s a convention here on innovation in the investment world and a lot of very interesting stuff. One thing that really caught my attention, which is super interesting, is the tokenization of investments on the blockchain. And you may be saying, I have no idea what that even means, those of you watching, but probably within the next five years, you’re going to be using that just like you use your credit card today. It’s going to be that normal. So really, some interesting stuff that’s changing so very fast, but let’s stick to the point here, which is Jordan, we’ve made a big change, probably we, you know, change we haven’t made in years like this. Tell us what
that is, yeah. So you know, for most of our clients, you know, as part of their fixed income portfolio for years and years and years, on a general basis, we hold roughly 20% in high yield bonds, right? So we invest in companies that might have some sort of distress and balance sheet issues. And so we’ve been part of that market because it pays a big old yield, you know, it can give some upside. It’s still, you know, it’s kind of a hybrid equity looking like bond, and we’ve held those for a long, long time. And what we’ve made the decision to do is go ahead and move out of that asset class, right across the board for all of our clients that hold those,
okay, so high yield bonds, for those of you who are not familiar with that, is is basically it’s corporations that need money, so they borrow money, and They’re called high yield because they pay a higher yield, so that that’s why they’re called that. And so normally, what happens is these companies, corporations are considered to be more risky to lend to than the federal government of the United States, and so therefore they should pay us a higher interest rate than if you borrow from the government by buying government bonds. So where are we today? What’s happening? Yeah, so that’s
something you alluded to. It like, what spreads look like. So typically, we’re looking at the relationship between how much somebody that’s investing in a high yield company in a high yield bond is they’re going to how much they’re going to demand relative to, maybe, let’s call it a benchmark, a 10 year treasury that’s backed by the government, kind of guaranteed, right? It’s kind of the risk free rate. And you’re looking at that ratio. And there are times where those ratios widen and times where they compress, and in times where they compress, what that can signal is that the bond market is very complacent, almost overly optimistic about forward conditions, because they’re not asking for that much of a premium relative to a guarantee. Okay, kind of
record lows. So Jordan, I love you. But let me put that all in English for those people who don’t understand all that. So basically, the interest rate if, if I’m going to borrow, if the government is paying me the same interest rate and a corporation is paying me the same interest rate, why would I do that? That doesn’t make sense, because they’re higher risk. I would demand, if I’m lending to somebody who is a higher risk, person who’s going to pay me back, I want them to pay me a higher interest rate than I would if I’m borrowing if I’m lending money to somebody that it’s pretty much a lock that they’re going to pay me back. That’s right, that difference between the lock interest rate that I get from I know I’m going to get it and the higher risk one. That difference is called a credit spread, right? Just think of the spread between the interest rates. So if the spread is wide, what that means is, is that we understand that these people are higher risk, so they should pay us a higher interest rate, and these people are safer, so they should pay us a lower interest rate. So you have a spread when that spread gets very narrow, what it tells. Us is we’re not scared of these high risk bonds anymore, and normally that is a kind of a top or a place in the market where it’s telling us maybe this is not the place we want to be anymore. So Jordan, why don’t you share with us some some charts and graphs. Let’s do that. Let’s have some fun with charts and graphs.
Pictures are always good, right? Just to kind of ingrain a point here. So the first graph will look like is on the top, and that’s demonstrating what you talked about is in the blue lines there is showing, on average, how much are investors demanding, right, asking for to invest in a high yield corporate bond. That’s the blue line on the top there. And so you know that ranges. If you go back to the early 2000 they might be asking for 10% all the way today, on average, closer to 6%
look there, if you look at the bottom, you can see 2008 and what people were saying is, I’m if I’m going to lend money to a company in that environment, I want 16% interest. So you can see the blue line went way up like that. I want a very high interest rate from you, because I think you’re going out of business tomorrow, and I want to be paid a lot, right?
That would show where the market is pricing in probably relevant conditions, right? They see the risk ahead. So, yeah, okay, I’ll invest in you, but only if you get to me all the way up to 16% which would be kind of equity, like return, stock returns.
Meanwhile, if,
yeah, if you just keep on going down there, right and come to like where we are today. So go down to 2026, if you look on the bottom before, before you
leave that, sorry, Jordan. But if you go back to that top chart and you look at 2008 which is, can you put your cursor on it, just so you see it, yeah. So corporate bonds, because they were risky, people were demanding almost 25% interest. It looks like if you, if you look at that, the peak, yeah. But then you look at what they were demanding from government bonds, and it was about 3% or less. Why? Because we considered those to be safe, and it’s okay to lend, to lend money to the government. When we buy their bonds, we’re lending them money. But corporate bonds, we want 25% because you guys are going to go out of business. That’s right. So that leads us to the middle chart. Tell us about that one.
So the middle charts could say, Okay, over the last 26 years, on average, what is the spread between how much you know, investors would require to invest in a high yield corporate bond versus 10 year treasury, and so over the last 26 years, on average, the mean, okay, is 488 basis points. So let’s just round up. What that means is, on average, people investing in a high yield corporate bond demand 5% more to invest in those types of bonds versus a treasury bond. Yeah, and
again, sticking with 2008 that little, that spike you see there is the difference between the two, right? So in that situation, the credit spread widened, right? There was a massive divergence between what people demanded from corporate bonds and what they demanded from our government because of this, the difference in the risk. So you see that big spike up there. And if you go all the way to the right Jordan, tell us what’s happening there. Which is where we are today. Yeah. So you
go the right, you go, you know, basically since called the summer of 2022 till now, you know, the trend has been spreads have been narrowing, meaning investors have been more and more optimistic that we’re going to be in a healthy environment, healthy economy, good jobs, we’re going to get our dollars back. So they’re demanding less and less return relative to just investing in treasuries. And we’re at almost historic
lows right now, historic lows. So basically, what the investors are saying is we think that corporate bonds are just as safe as the government is, and that’s not realistic in the long run. You know, basically it’s saying that we’re afraid of nothing, and that’s a risky time when investors are exhibiting what you might call irrational exuberance, to quote Alan Greenspan back in the day.
No, that’s exactly right. And so, you know, if you go to this bottom chart here, and you see kind of the type in here, that once you get below about, you know, a 2% spread, we would call that kind of excessive optimism is priced into the market. And we don’t know how long we can be in that state of excessive optimism, right? You could be in there for a while, but what you’d certainly say from probabilities wise, is at some point people are going to get are going to become fearful demand excess premiums and excess return, and that is going to be bad for people that are owning high yield corporate bonds.
Okay? So therefore, given that the credit spreads are so tight, they’re almost historically tight, what that’s telling us is that the that particular segment, high yield bonds, potentially, are at their peak. It’s it’s unlikely that the spread is going to get any smaller between the government interest rate and the corporate interest rate. And if it goes up, because we have any hint of recession, and certainly with the war in Iran, we could have higher inflation, higher costs of fuel. And if that happens, and there’s any hint of increased inflation or reduced economic activity, then those spreads could spike and the value of those bonds could fall significantly. And so that’s why we’re we’ve decided to make this change Correct.
That’s exactly it. You know, we look at kind of the risk profile of that segment, and what we say is, look, you know, we don’t know if we’re going to come into a 2008 type of environment or 2000 type of environment. We don’t know, but those types of bonds, if spreads start widening greatly, you can see how your bonds go down 30 or
40% Yeah, and it wouldn’t take much for that to happen. I mean, any hint that we’re going into recession, or any hint that corporate profits are at risk, and we could see that happen pretty quickly, so we’re trying to get ahead of the curve and take advantage of it. Now, those spreads may continue for a while, but you know, there’s, there’s an old thing about getting out while the getting is good. So tell us. Jordan, okay, fine, so we’re moving out of high yield bonds. What are we moving into? What are we exchanging for? Right? So that
is always a question, because when we look at high yield bonds, you know, the role that we want that to play? You know, historically, yes, it is part of our bond portfolio. The problem is, for us is, yes, if high in the best conditions, it has a high yield on it, a high dividend, but the loss profile is not good. So what we’re looking to do is say, well, we would still like to have a healthy yield on that part of the segment, right? We want to go in there and say, Okay, is there a way for us to get still, you know, Treasury like yields are higher.
But just again, just to translate Jordan for you guys, yield means interest rates. Okay, interest rates, you get a
good interest rate, that’s right. So we want a good interest rate, right? A good dividend yield. We want all those things, but what we want to, you know, again, reduce our risk. And so what we are doing is we are exchanging high yield corporate bonds for an on average, very short term investment grade, corporate bonds. So still corporate bonds, but there’s not the high yield space, and the maturity until those bonds come due is, let’s call it shorter than the other ones, which also helps that type of risk.
So when you’re looking at a shorter maturity rate, why that reduces your risk is because if you buy a bond that’s going to mature in five, seven or 10 years, versus one that’s going to mature in a year or two, the you get your money back sooner, and therefore the risk you have is shorter, right? Because you’re not holding that bond to maturity now you’re the maturity is shorter, so that reduces the risk in the bond. And right now, because the spreads we’ve been talking about are so tight, the interest rate, the dividend that we’re getting is very similar. So we can essentially get, you know, and it’s not a guarantee, it’ll continue forever, but we can essentially get very close to the same yield interest rate, but for significantly less amount of risk, and that’s and that could change, right? So there’s no guarantees here, but that’s the logic behind why we’re making this change.
That’s right, you know, we’re still looking for that part of the segment, that part of the portfolio look. We’d like to find an interest rate that is higher than what you get on government bonds, but we just want to pull down the rate the risk. So that’s where we’re going into short term corporate bonds, and that’s the move we’re looking
we’ve made, okay? And when is this going to happen?
Jordan, well, for at least our client base, you know, we’ve already made it.
You’ve already done it. Yeah,
that’s those, those those those SEC rules on front running and insider and all those things that we have to be mindful
of, right? We have to tell you after the fact, because if we tell you before the fact, then people could buy or sell, and it’s called front running ahead of us and try to profit from our move, because we move significant amounts of money when we make these changes. And of course, all of our employees are subject to these rules as well. They’re not allowed to do any of that. Potentially, if you do something like that, it’s insider trading, and you can go to jail. So very strict rules around that. So we tell you after the fact. We can’t tell you before, we’d love to, but that’s the nature of the beast. So anyway, yeah, this is, in our view, a very good move to make at this time. We don’t see fear running through the streets about this, and that’s usually the best time to move things. Now, one other question I have for you is, is this going to cause a lot of taxes for people who are, you know, in the high yield bonds, or moving it to the shorter term bonds, is there going to be a capital gain or income tax consequence for that? Yeah, so,
you know, again, the way we’ve worked historically is, you know, we’re buying and selling, we’re rebalancing our fixed income portfolio, you know, relatively frequently with throughout the years. And so, you know, we’ve been buying and selling these over the last few years, but on average, we don’t expect to see, you know, massive, even significant tax ramifications, because most of the, let’s say, gain that we’ve we’ve gotten on our high yield bonds has been just due to the the interest rates, the dividend itself, right? There’s been some movement in there, but most of the, you know, the money we’ve made in that segment has just
been from the dividend itself. Yeah. And as I look back over several years, the value of the high yield bonds has gone up and down a lot, but they basically stayed the same. So the amount of gain we have in the price of the bonds is not significant, but the interest, the dividend that we’ve been getting is kind of, as you said, where we’ve been making our money from that. So that’s why we’ve made the change. We tell you after the fact. You know, years ago, we used to, we used to be able to tell you in advance, but as the amount of money we manage has grown, and we potentially are a market mover, and somebody could actually front run us and make some profits. There we’ve you know the rules change as you grow, and you have to abide by them. So Jordan, thank you for that very enlightening thing. And I hope, ladies and gentlemen, that you had more fun than a human being should be allowed to have when learning about credit spreads, high yield, bond yields and Treasury yields. So I hope you learned from this. I hope it was entertaining. Make sure you share this with your friends. Make sure you like and subscribe and as always, we’ll talk soon.

Please note: transcript has been modified after the time of recording. 

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