Managing asymmetric risk in a market priced for perfection

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Reams Asset Management

Managing asymmetric risk in a market priced for perfection

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Markets are entering the next phase of the cycle priced for a narrow path: resilient growth, contained inflation, stable earnings, and uninterrupted liquidity. That is a high bar. Investment-grade spreads remain at or near historical tights, with limited dispersion across issuers, leaving valuations vulnerable if macroeconomic conditions fall short of expectations. In other words, credit markets continue to price for perfection.

The problem is that the current backdrop is anything but perfect. The war in the Middle East has raised energy and inflation risks, while elevated public debt, private credit concerns, and stretched equity valuations could amplify market stress — especially in lower-quality markets. Tariffs and policy uncertainty continue to create downside risks to growth, while the fiscal backdrop remains a potential source of volatility.

Against this backdrop, maximizing carry looks increasingly fragile even as the level of carry relative to the risk-free rate remains near historical tights. The issue is not that income is unattractive, but that today’s spread levels provide limited compensation for a policy surprise, inflation shock, refinancing stress, liquidity event, or broader risk-off move. Conservative positioning is therefore not a bearish call — it is a recognition that expected returns are becoming more asymmetric.

In this environment, we believe portfolios should prioritize quality, liquidity, and flexibility. With markets priced for benign outcomes, preserving capital and maintaining dry powder to provide future flexibility during periods of volatility may be more valuable than reaching for incremental yield.

Key takeaways

Current credit spreads offer modest incremental income for assuming additional credit and liquidity risk. Carry can slowly enhance returns in stable environments, but losses can materialize quickly. The issue is whether carry sufficiently offsets the impact of a shock.
The key risk is asymmetry. Investors gain incremental yield by moving down in quality or structure, but downside risks are nonlinear. Late-cycle environments often overly compress spreads, leaving investors undercompensated for liquidity, refinancing, and credit deterioration risks when conditions tighten.
This dynamic is especially relevant for yield- or carry-focused strategies that assume that stability will persist. We focus on whether carry compensates for potential drawdowns. In our view, current carry provides a thin margin for error, and the risk/reward skews unfavorably if volatility or a shock materializes.

Modest compensation for additional risk

Bloomberg US Treasury Index risk-free rate vs.
Bloomberg US Corporate Bond Index all-in yield

Source: Bloomberg, as of 5/27/2026.

Risk Information:

Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures

There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized.

Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

Many investors consider bonds to be “risk free” investment vehicles. Historically, bonds have indeed provided less volatility and less risk of loss of capital than has equity investing. However, there are many factors that may affect the risk and return profile of a fixed-income portfolio. The two most prominent factors are interest-rate movements and the creditworthiness of the bond issuer. Bonds issued by the U.S. government have significantly less risk of default than those issued by corporations and municipalities. However, the overall return on government bonds tends to be less than these other types of fixed-income securities. Investors should pay careful attention to the types of fixed-income securities that comprise their portfolio and remember that, as with all investments, there is the risk of the loss of capital.

The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

Indices

Bloomberg US Corporate Bond Index — Measures the investment grade, fixed-rate, taxable corporate bond market.

Bloomberg US Treasury Index — Measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index.

BLOOMBERG, BLOOMBERG INDICES and Bloomberg Fixed Income Indices (the “Indices”) are trademarks or service marks of Bloomberg Finance L.P. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited, the administrator of the Indices (collectively, “Bloomberg”) or Bloomberg’s licensors own all proprietary rights in the Indices. Bloomberg does not guarantee the timeliness, accuracy or completeness of any data or information relating to the Indices.

About Reams Asset Management

Reams Asset Management is a fixed-income management firm that implements a consistent investment process across all of its strategies. Reams’ mission is to provide the highest quality investment management expertise and unmatched client service in each of its product areas over the long term.