Key Takeaways
- Evaluating relative value helps investors see beyond headline yields and identify when higher returns truly justify higher risk in diverse US investment markets.
- Focusing on risk-adjusted returns helps investors measure how efficiently each investment rewards the level of risk taken, leading to more balanced, informed decisions.
- Credit ratings reflect repayment ability, showing that higher yields often come with greater default risk while safer issuers offer lower, steadier returns
- Liquidity matters because more tradable US securities provide flexibility, faster access to cash, and lower costs when adjusting portfolios or exiting positions.
The Importance of Relative Value in US Investments: How To Compare and Assess Investments
With the GOJ USD bond redemption, investors will be assessing a wide range of options from different institutions. A common quandary: Bank A is showing me 4.5%, Bank B is showing me 5.6% and Bank C is showing me 8.5%. How do I know which to choose? Do I go with the highest rate? What’s the difference between these investment options?
In the context of US investments, investors face similar choices when comparing Treasuries, corporate bonds, and municipal bonds that differ widely in yield and risk.
US investors must also consider the credit rating of issuers, especially when comparing high-yield corporates to safer government-backed products.
Relative value plays a major role in determining whether a higher yield truly compensates for higher risk in the US market.
Because the US market is one of the most liquid and diverse globally, identifying value requires careful comparison and awareness of alternatives. Evaluating relative value helps US investors avoid choosing an option simply because it appears to offer the “best” rate on the surface.
Why Returns Must Be Viewed With Risk
A return cannot be viewed in isolation. The risk of each investment must be assessed along with the return. Here, we introduce the concept of “risk adjusted returns”. Everyone wants the best bang for their buck: the car that drives the most miles per gallon, the exercise that burns the most calories per minute, the highest return for the least risk etc. The risk adjusted return is the metric that is used to measure the latter.
When evaluating US investments, especially corporate bonds versus US Treasuries, it’s important to look beyond yield alone.
- Corporate bonds typically offer higher yields.
- US Treasuries, on the other hand, tend to yield less but come with far lower risk.
Because of this, Treasuries often provide better risk-adjusted returns, meaning you earn a more stable reward for the level of risk taken.
Investors who chase yield without considering stability may miss the true value that many US fixed-income products offer.
By focusing on risk-adjusted returns, you gain a clearer picture of whether an investment truly delivers value relative to its risk, a critical mindset in a market where opportunities vary widely across sectors and issuers.
Comparing Similar Bonds with Different Risks in The Context of US Investments
An example may best illustrate the point.
- Bank A is showing a Government of Jamaica (GOJ) 6.75% 2028 bond which is popular among investors and is currently yielding roughly 4.5%. GOJ debt is rated B by S&P which is generally viewed as high risk. An important question to ask is: is this the best yield I can get for this level of risk?
- Bank B is showing an A rated European bank that has a coupon of 8.125% and a call date in 2025 with a yield of 5.6%. This instrument carries much less credit risk than the 4.5% being shown by Bank A.
- Bank C is showing a Colombian private company that is rated B+ which is also categorized as high risk but rated slightly above the Jamaican sovereign. The lesson here is that investors may be able to access higher yields for the same credit risk. It’s important to ask your investment advisor what similarly rated credits are yielding in the market.
When you look at US investments, bonds with similar credit ratings often have very different yields based on the issuer and sector. For example, US investment-grade corporate bonds may pay more interest than international bonds with the same ratings because the US market is deeper and more liquid.
US bonds with high yields can also give good returns, but you need to carefully look at the issuer’s stability and the state of the economy.
Relative value analysis helps investors avoid settling for lower yields when there are safer or more liquid US options available.
Investors can find out if they are being paid enough for the risk by comparing global investments to US investments.
To learn more about US Bonds, explore Investment Bonds | Global US $ Bonds Options.
What the Risk-Adjusted Return Tells Investors
The “risk-adjusted return” essentially forces the investor to focus on how much value (i.e. return) is being generated per unit of risk that is being assumed. It is a good way to compare investments across different risk profiles. It is also a good tool to use when choosing between a high-yielding asset and a lower-yielding asset. What additional risks do you take to get that higher return?
Credit Ratings and Why Yields Differ in US Investments
A GOJ B rated USD bond might offer a yield of 4.5% while a Government of Mexico BBB+ rated USD bond of similar duration maturity may offer a yield of 3.4%. Important facts belie the difference in interest rates. The most common factor that accounts for the difference in the coupon payment or yield is the creditworthiness of the borrower.
The higher the capacity of the issuer to repay the bond, the lower the risk and the lower the coupon rate. The lower the capacity of the issuer to repay the bond, the higher the coupon rate and risk. Return and risk move in opposite directions, and credit ratings can be very useful indications of the relative risk associated with a bond.
Read the full post on Credit Rating and Quality.
Liquidity and Practical Choice
Make sure you are getting the best bang for your buck and consider the risk level of each security you compare. There are ways to increase return without increasing the credit risk of your portfolio. Be sure to ask your advisor about the liquidity of each instrument i.e. how easy is it to sell if you want to exit the investment.
Instruments which trade in the international capital markets and are part of large issues are likely to have more liquidity than small, locally held issues.
Get expert guidance from Sterling to ensure you’re capturing the best opportunities in global US bonds with the right level of liquidity and risk.
FAQs
Should I Always Choose the Investment With the Highest Yield?
Not necessarily. A higher yield often signals higher risk. In US investments, a corporate bond may advertise a much higher rate than a Treasury bond, but it may carry credit, liquidity, or economic risks that must be evaluated before deciding.
How Do Credit Ratings Affect Yields?
Credit ratings reflect the issuer’s ability to repay its debt. Higher-rated US issuers, such as the US government or top corporate names, pay lower yields because they are more secure. Lower-rated issuers must offer higher yields to compensate investors for added risk.
What Role Does Liquidity Play in Choosing US Investments?
Liquidity determines how easily you can sell a bond if needed. US Treasuries are highly liquid, while certain corporate or municipal bonds may be harder to trade. More liquid securities often provide more flexibility and lower transaction costs.
What Questions Should I Ask My Advisor When Comparing US Investments?
Ask about credit rating, yield, liquidity, issuer stability, market alternatives, and how the bond compares to similarly rated US investments. Understanding these factors helps ensure you’re selecting the best value for your risk level.
From The Sterling Team
Marian Ross is an Assistant Vice President of Trading & Investment at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor.
Visit our website at www.sterling.com.jm
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