The premium between corporate debt and Treasuries has shrunk to its lowest level in over a decade, reflecting growing confidence that inflation won’t negatively affect the economic recovery and bolstering the outlook for corporate bond-related exchange traded funds.
The shrinking difference between investment yields, or the spread, means investors are comfortable with much lower premiums for corporate debt exposure as confidence improves and more traders look for higher-yielding assets in a low return environment.
While inflation fears have weighed on fixed income bets, an increasing number of investors are coming around to the Federal Reserve’s outlook that the spike in consumer price rises will prove transitory.
“The Fed has been controlling the transitory narrative which has provided confidence to corporate bond investors,” Adrian Miller, chief market strategist at Concise Capital Management, told the Financial Times. “After all, corporate bond investors are more focused on the expected strong growth path.”
Confidence also strengthened Wednesday after Fed officials signaled that it would eventually begin rolling back crisis policy measures, fueling a more optimistic outlook for the economic rebound.
“For the time being people are not at all fearing the price action of a move higher in yields,” Andrzej Skiba, head of US credit at BlueBay Asset Management, told the Financial Times. “Companies are doing really well and we are seeing a meaningful recovery in earnings.”
Investors looking to strengthen their fixed income strategies can look to the Avantis Core Fixed Income ETF (AVIG), which invests in a broad set of debt obligations across sectors, maturities, and issuers. AVIG pursues the benefits associated with indexing, such as diversification and transparency of exposures. Yet the fund also has the ability to add value by making investment decisions using information embedded in current yields.
The Avantis Core Fixed Income ETF’s investment process uses an analytical framework, which includes an assessment of securities’ expected income and capital appreciation, to seek securities with high expected returns.
The Avantis Short-Term Fixed Income ETF (AVSF) also invests primarily in investment grade quality debt obligations from a diverse group of U.S. and non-U.S. issuers with a shorter maturity.
Finally, the actively managed American Century Diversified Corporate Bond ETF (KORP) invests in U.S. dollar-denominated corporate debt securities issued by U.S. and foreign entities, but may also hold securities issued by supranational entities. Up to 35% of the fund’s net assets may be invested in high-yield securities or junk bonds. The fund may also invest in derivative instruments such as futures contracts and swap agreements. The weighted average duration of the fund’s portfolio is expected to be between three and seven years.
For more news, information, and strategy, visit the Core Strategies Channel.