Are Investors Underappreciating Risk?

Some assets may have rallied too far, too fast


Investors have breathed multiple sighs of relief in recent weeks as the Trump administration has dialed back its extreme tariff rates on China and other countries. In addition, first-quarter earnings were better, overall, than many expected given the quarter’s uncertainty.

As a result, there has been a rally in risk assets such as equities and high-yield bonds.

But have these assets come too far, too fast?

Consider the spread between high-yield bonds and comparable duration low-risk U.S. Treasury bonds. Simply, this spread acts as a market-based gauge of credit risk and economic sentiment. As seen in the chart, high-yield bonds are currently yielding 305 basis points more than Treasuries. That’s significantly lower than the 334-basis-point spread seen right before Trump surprised investors with his Liberation Day tariffs in early April (indicated by the red diamond in the chart).

Spread Between High-Yield Bonds and Comparable Duration Treasury Bonds
(as measured by Bloomberg US Corporate High Yield Average OAS Index)


Source: Bloomberg, calculations by Horizon Investments, data as of 05/16/25.

The upshot: Today’s market sees junk bonds as relatively less risky than before Trump started the trade war. While they may be right, there’s no question that much uncertainty remains about where tariffs may go from here, how the U.S. and various countries will reach new trade deals, inflation, consumer spending, and economic growth.

Given those and other question marks, we believe many goals-based investors should consider adopting strategies that allow them to participate in potential market gains going forward and mitigate the risk to their portfolios from sharp downturns brought on by more surprises. Because markets have rallied, investors should review their risk tolerance appetite following the recent volatility and reconsider their impulse to abandon risk mitigation strategies.

This commentary is written by Horizon Investments’ asset management team. Past performance is not indicative of future results. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry, or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice, or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. All investing involves the risk of loss.
The investments recommended by Horizon Investments are not guaranteed. There can be economic times when all investments are unfavorable and depreciate in value. Clients may lose money. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The opinions expressed herein are our opinions as of the date of this document. These opinions may not be reflected in all of our strategies. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent. Forward-looking statements cannot be guaranteed. Other disclosure information is available at www.horizoninvestments.com.
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