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When 'Risk-Free' Suddenly Isn't

Western Asset CIO and manager Steve Walsh says the sovereign risk of developed countries is going to confront investors over the intermediate term.

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Michael Herbst: I'm glad you touched down on some of the uncertainties facing the bond markets these days for two reasons. One, you had mentioned how risks in some areas, such as what we're seeing in the situation with Greece right now, could actually lead to a reconsideration or a re-pricing of other kinds of risk that may or may not be connected to that situation at all. Could you expand on that a little bit?

Steve Walsh: Yeah. One of the observations over the course of the last 18 months has been risk has performed pretty much in tandem. When risk does poorly, all risk does poorly. Very highly correlated. Stocks are down, credit is down, all spreads widen out. In a normal period you get some variation. Asset classes perform at different levels. Greece obviously widening out from 100 over at the end of the summer to as much as 450 over a few weeks ago, is obviously responding to their particular budget situation.

Michael Herbst does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.