What does it take to build a resilient bond portfolio in an era of persistent uncertainty, rising public debt, and stubbornly elevated inflation? In this episode of the Bondfish Human Finance Podcast, host Anatoly Shkareda, Chief Marketing Officer of Bondfish, sits down with Lorenzo Raffo, one of Italy's most respected voices on fixed income markets and a contributor to CNBC Italia. The conversation covers the most common mistakes made by Italian retail investors, where Raffo sees opportunity in today's bond market, and the principles guiding his own portfolio construction in a complex and fast-moving environment.
What Makes a Good Bond Idea
Raffo opened the discussion by challenging the premise of a neat "checklist" for identifying a good bond idea. While such a framework exists in principle, he argued that the sheer number of variables shaping bond prices today makes any static evaluation model inadequate. Yield levels, credit quality, duration, issuer profile, currency, and macroeconomic backdrop all interact in ways that shift constantly. As an illustration, he pointed to the German Bund, whose ten-year yield reached 2.8% at the time of recording, a level that would have seemed entirely implausible just twelve months earlier.
For Raffo, this volatility signals a deeper structural shift: the bond market has ceased to be a passive, buy-and-hold asset class and has become an arena demanding active management. The old approach of purchasing a bond and holding it to maturity, which served private investors well for decades, is no longer sufficient given the pace and magnitude of price swings now occurring across maturities and geographies. Germany, he observed, remains a relative safe haven within Europe, but its status as the continent's unquestioned anchor has diminished meaningfully.
His recommendation for navigating this environment is what he called a dynamic strategy: continuous reassessment of positions, readiness to reallocate across durations, and awareness that market equilibria are still being sought rather than established. A Bund yield approaching 3%, or perhaps 3.1%, he suggested, might mark a threshold at which the market begins to reprice more stably, but he was careful to frame this as a possibility rather than a forecast.
Portfolio Construction
When asked how he constructs a portfolio, Raffo returned repeatedly to a single word: diversification. He was emphatic that diversification should be pursued across every available dimension simultaneously. Issuers, maturities, credit ratings, structures, yield profiles, currencies, and coupon types should all vary within a well-built portfolio. Concentrating across any one of these axes, he argued, introduces a fragility that becomes visible precisely at the moments of stress when protection is most needed.
A specific structural preference he outlined is the use of bonds with low minimum denominations, typically 1,000 euros or 2,000 dollars, rather than instruments with thresholds of 100,000 euros or more. The rationale is flexibility: smaller denominations allow an investor to increase a position incrementally when prices fall sharply, turning volatility into opportunity rather than a source of paralysis. Larger-denomination instruments, while often offering appealing yields, constrain the investor's ability to react dynamically.
On duration, Raffo advocated for a balanced distribution across short, medium, and long maturities. While the market currently favours shorter and medium maturities, he cautioned against an abrupt wholesale rotation out of long-duration positions, noting that crystallising capital losses in order to reduce duration risk is a decision that cannot be evaluated in isolation from an investor's broader financial situation and time horizon.
“A portfolio is built by diversifying to the maximum degree, diversifying by issuers, by maturities, by ratings, by structures, and naturally by yield distribution and coupon components.
— Lorenzo Raffo, Financial Journalist & Contributor, CNBC Italia
Common Mistakes
Raffo was direct when asked about the most frequent mistakes he observes among Italian retail investors. The first and most significant error, in his view, is gravitating toward illiquid bonds. He noted that a segment of investors, including personal acquaintances and market participants who consult him directly, regularly enquires about bonds with very limited secondary market liquidity. High-denomination instruments, those with thresholds of 100,000 euros, tend by their nature to be less liquid, and Raffo considers this a structural disadvantage that many retail investors underestimate.
He situated this pattern within a broader regulatory and cultural context. Italian retail investors are constrained by protective regulations that were introduced in response to significant bond market defaults in past decades. These rules, while well-intentioned, effectively limit access to foreign bond exchanges, including the Frankfurt Stock Exchange, which serves as the primary reference market for European bond trading. As a result, Italian retail investors tend to concentrate their holdings within a narrower universe: Italian government bonds (BTPs), eurozone sovereigns, some supranational bonds in emerging-market currencies, and a selection of domestic mini-corporate bonds from issuers such as MAR, Alerion, KME, and Alperia, alongside bonds from Italian financial institutions including Intesa, Mediobanca, and Unicredit.
The second major error Raffo identified is the pursuit of capital gains through very long-duration bonds. The recent period has seen many retail investors extend duration aggressively in search of higher returns, a choice he described as problematic given the current rate environment. The compressed opportunity set available to Italian retail investors pushes some toward instruments in the less liquid segment of the market that carry meaningful risks over the medium to long term.
“The search for performance in terms of capital gain leads investors toward this choice. It has been a mistaken choice.
— Lorenzo Raffo, Financial Journalist & Contributor, CNBC Italia
Opportunities & Risks
Asked where he sees opportunities in today's global bond market, Raffo was measured. He acknowledged that the significant decline in prices across long-duration bonds represents a potential entry point for investors who are building a portfolio from scratch, in that higher yields now offer more attractive risk-adjusted return profiles than were available a year or two ago. For investors already holding long-duration exposure, however, the same price declines mean the opportunity comes at the cost of realising capital losses on existing positions, which may or may not be appropriate depending on the individual's circumstances.
He described the current environment as one in which "buy opportunity" analysis has become as complex in fixed income as it has historically been in equities, a comparison that underscores how profoundly the bond market has changed. The uncertainty that has characterised bond markets for months, he argued, has not yet found adequate resolution. Moderate economic growth, inflation that has fallen but not as quickly as many expected, and a sustained post-pandemic surge in public expenditure across most major economies all represent ongoing structural pressures on sovereign bond markets. These forces, he observed, are pushing investors to demand higher term premiums, which in turn supports relatively elevated yields in corporate credit.
Corporate bonds, particularly those with shorter and medium durations, have held up better than long-duration sovereigns in recent months. Raffo noted that yields in this segment can offer an adequate risk-return profile given the current macroeconomic uncertainty, though he declined to name specific instruments, citing the complexity of the environment and the importance of individual investors maintaining a medium to long-term, capital-protection perspective.
Practical Framework
Diversify across every dimension simultaneously. Vary issuers, maturities, credit ratings, currencies, structures, and coupon types. Concentration along any single axis is a source of fragility that tends to reveal itself at the worst possible moment.
Favour low-denomination bonds for flexibility. Instruments with minimum thresholds of 1,000 euros or 2,000 dollars allow incremental position-building when prices fall, turning drawdowns into opportunities rather than obstacles.
Balance short, medium, and long maturities. The current market clearly prefers shorter and medium durations, but rotating entirely out of long-duration positions may crystallise capital losses whose long-term cost exceeds the benefit of reduced risk exposure.
Prioritise liquidity. Bonds with limited secondary market depth create exit risk that can dwarf any yield advantage at the time of purchase. This is especially relevant for instruments traded only on domestic markets with high minimum denominations.
Adopt a dynamic, actively managed posture. The buy-and-hold paradigm has become insufficient in today's bond market. Regular reassessment of positions, willingness to switch across durations, and maintenance of liquid reserves to capture entry points are now essential components of a sound fixed income strategy.
Key Takeaways