MW Why junk bonds right now might paradoxically be a way of reducing risk with stocks at record highs
By Steve Goldstein
High-yield bonds have outperformed stocks during low-growth periods, fund manager finds
It may be a good time for junk bonds, argues AllianceBernstein.
There's a huge barrage of news that has hit investors this week, but the bigger picture is that the stock market is flirting with records at a time when faith in the economy is eroding.
So there was a timely piece of analysis making a case on how investors can take some risk off the table without sacrificing too much in return.
It's from portfolio managers at AllianceBernstein, who make the case for high-yield bonds - often called junk - as a substitute for investors who want to pare back their stock-market holdings.
"Investors looking to remain in stocks but rotate out of higher-risk holdings typically look to rebalance into investment-grade bonds. Government bonds and high-quality credit assets do have their place in a diversified portfolio, but we believe high-yield corporate bonds warrant a closer look-particularly in today's market," says a piece from William Smith, director of credit, and AJ Rivers, head of U.S. retail fixed-income business development.
Over the last 25 years, high yield JNK has produced average annual returns of 7.6%, versus the S&P 500's SPX 9.8%, but at nearly half the volatility.
"By shifting a portion of their equity holdings into high yield, investors could meaningfully reduce their overall volatility while conceding relatively little in return. What's more, we think the return and volatility relationship between high yield and equities may be even more compelling than usual today, thanks to a combination of elevated yields and slow economic growth," they say.
In periods of low growth, high yield actually outperforms equities. And, historically, high price-to-earnings multiples often correlate with below-average returns. "Given increasingly sluggish demand and diminished global trade, the timing could be just right, in our view, to deploy high yield," they say.
There are two risks to this path that go unaddressed in the AllianceBernstein piece. One is that the U.S. economy will outright tip into the recession. Separate data finds high-yield bonds fell in value by 5% during the 2008 global financial crisis and tumbled 8% in the short-lived COVID downturn. That's still not as bad as stocks during those time periods but not the positive return that government bonds saw in both downturns. Investment-grade bonds meanwhile produced gains during the financial crisis and saw smaller losses during the pandemic.
The other big risk is that investors would underperform if the economy doesn't decelerate, a possibility if artificial intelligence is as revolutionary for the economy as many of the world's top tech companies seem to believe.
The markets
U.S. stock futures (ES00) (NQ00) pointed lower. Gold (GC00) held the $4,000 level. The yield on the 10-year Treasury BX:TMUBMUSD10Y was 4.07%.
Key asset performance Last 5d 1m YTD 1y S&P 500 6890.59 2.85% 2.67% 17.15% 18.52% Nasdaq Composite 23,958.47 5.36% 5.29% 24.07% 28.75% 10-year Treasury 4.069 6.40 -1.70 -50.70 -22.10 Gold 4011.1 -3.19% 3.36% 51.98% 45.64% Oil 60.07 -2.72% -1.01% -16.42% -14.83% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
There was a huge wave of news, not to mention continued fallout from Fed Chair Jerome Powell putting a December rate cut in jeopardy.
The U.S. and China agreed on a deal to soothe trade tensions, that will include China putting a one-year delay on rare-earths export restrictions as the U.S. lowers tariffs tied to fentanyl in half to 10%.
Alphabet shares $(GOOGL)$ jumped 7% as third-quarter earnings came in ahead of Wall Street estimates, particularly for cloud services.
Meta Platforms stock (META) dived 7% after a miss on profit margins and a soft revenue guide, as the Facebook and Instagram parent forecast increased capital expenditure next year.
Microsoft shares weakened $(MSFT)$ as it also expected more capital expenditure spending this year,
Apple $(AAPL)$ and Amazon.com (AMZN) report after the close.
Also on the earnings front, Chipotle Mexican Grill stock $(CMG)$ tumbled and Starbucks $(SBUX)$ reported a surprise increase in same-store sales.
Best of the web
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The chart
It's tough out there. Data from the JPMorganChase Institute finds inflation-adjusted purchasing power of prime-age workers - those between 25 and 54 years old - rising near the slowest pace in a decade, outside of the pandemic. It's particularly tough for younger workers - growth for the 25-to-29-year old bracket is now 4 percentage points higher than a typical mid-career individual in their 40s, versus the 6% to 7% level prior to the pandemic.
Top tickers
Here were the most active stock-market tickers as of 6 a.m. Eastern.
Ticker Security name NVDA Nvidia TSLA Tesla META Meta Platforms MSFT Microsoft GOOGL Alphabet CMBM Cambrium Networks BYND Beyond Meat PLTR Palantir Technologies AMZN Amazon.com GME GameStop
Random reads
Just in time for Halloween - the white-knuckled wolf spider is back.
How the potato became a coveted prize for trick-or-treaters.
Also timely: floating pumpkin racing.
-Steve Goldstein
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October 30, 2025 06:41 ET (10:41 GMT)
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