In behavioural economics, the term ‘loss aversion’ is a phenomenon where people believe that potentially or actually suffering loss is more emotionally damaging than the upsides of a comparable game.
In short, it is naturally human to be fearful of losses. That’s why investors have been observed to jump ship when markets turn bearish.
Equities, particularly US equities, performed tremendously well after the pullbacks of 2022, with the S&P 500 index gaining 26.2% in 2023, followed by a gain of 25% in 2024. It was therefore not surprising that the common consensus among most investors was to invest in the US at the start of 2025.
However, 2025 has been a shaky year for equities attributed to geopolitical uncertainty characterised largely by US President Donald Trump’s tariff policies casting uncertainty and doubt into the minds of investors.
So far, major US indexes such as the S&P 500 index and the Nasdaq Composite Index, while still negative year to date (y-t-d), have bounced back from the April lows.
However, the scaling back of reciprocal tariffs are only temporary and there still remains the minimal 10% universal baseline tariff on trading partners by the US on top of the return of reciprocal tariffs expected to return after the pauses are over.
See also: US-China trade truce: Reprieve or realignment?
This suggests that uncertainty, while currently scaled back, should persist for the rest of this year and investors should continue to “expect the unexpected”, according to director of US high yield of AllianceBernstein (AB), Will Smith and head of AB's fixed income business development for Asia ex-Japan, Thierry Taglione.
Hence, diversification remains an important theme for the year. The underperformance of equities this year has prompted investors to look towards other asset classes, such as bonds, to protect and preserve wealth which the pair believes makes “perfect sense” in the uncertain environment of today.
While 2024 was a tough year for bonds, bonds have so far shined in 2025, highlighting their resilience as a hedge during times of economic uncertainty.
See also: Beyond the trade truce: Why Chinese stocks deserve a nuanced approach
“Fixed income has bounced back, actually all fixed income sectors have delivered positive returns (this year), especially if we look at global aggregate bonds. Both credit and government bonds in the global space have delivered 5.7% year to date up to end-April,” says Taglione.
Across fixed income, there are the riskier high-yield bonds and the less risky investment grade bonds on the market.
For investors with higher risk appetites that are looking for a hedge against a downturn in equities, high yield bonds are “typically a good substitute for equities”, says Taglione.
According to data from Bloomberg, Standard & Poor (S&P) and AB, high-yield credit has provided equity-like returns. Since the inception of Bloomberg US Corporate High Yield in July 1983 and the S&P 500’s inception in Mar 1936, US High Yield has produced an averaged annualised return of 8.2% compared to the S&P 500’s averaged annual return of 10.7%.
Additionally, according to this data, US High Yield provides such returns at about half the risk of the S&P 500, with an averaged annualised volatility of 8.3% compared to that of the S&P 500 at 16.6%.
Hence, the pair remain fairly optimistic on high yield bonds and the fixed income space for the year especially given the attractive yields of today that the high yield market is providing.
“We are going to have a slowdown, but the level of yield at the starting point really matters. Today, you get an 8% yield when you buy into the global high yield strategy, so you more than compensate for the default risks you are taking and even if credit spreads widen, you have enough buffer,” adds Taglione.
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Even for the less riskier government bonds, Smith believes that the current yields of 4.5% also present an attractive entry point for investors especially as interest rate cuts are expected to come in the second half of this year.
Besides good yields, the fundamentals remain supportive of high-yield credit. The quality of the high yield index for example, has improved significantly compared to before, with only about 13% of credit rated ‘Ccc' in 2025 compared to 20% of credit with that rating back in 2007.
However, high yield credit still does face exposure threats from economic growth cycles and tariffs which emphasises the importance of being ‘selective’ when investing in high yield.
“The high yield market tends to be mostly US companies that sell to US consumers and it tends to have a focus on industrial sectors like energy, metals, chemicals and parts of consumer related goods. So a lot of these industries are very cyclical in nature and they are really exposed to either the growth cycle, which we're concerned about, or they're really exposed to tariffs directly and some of them exposed to both,” says Smith.
“So in our view, especially as a high level investor, we need to be very selective about the companies we're running into,” he adds.
