Review The Risks To Dabble In Debt

“Remember wherever your heart is, there you will find your treasure.” Paulo Coelho’s famous words sum up the dilemma that the average debt investor faces at this very moment. The purveyor of debt, forever seeking his treasure (read: optimise his gains), is bedevilled by the central poser: should he follow an accrual strategy or should he adhere to duration? The question is embedded in the two primal risks that all debt allocations are potentially subject to. One set of risks arises directly from interest rate variations, while the other is generated by credit quality (or the relative absence of it). Adverse interest rate movements can certainly damage even the most well-constructed debt portfolio, a phenomenon we have seen on several occasions in the recent past. Yields have, in the very latest instances, changed significantly, and a large number of investors have...