With stocks racing to record highs, diminishing expectations of a recession, and hopes that the Federal Reserve could potentially reduce interest rates multiple times next year, risk appetite is being reborn. For how long that scenario lasts remains to be seen, but it’s having a positive impact on the bond market, providing support to the thesis that corporate bonds could be fixed income leaders in 2024.
Still, there’s a sense among some fixed income experts that when it comes to corporates in the new year, quality will carry the day. That could be good news for exchange traded funds such as the Calvert Ultra-Short Investment Grade ETF (CVSB ).
The actively managed CVSB turns a year old next month, indicating that it debuted at a trying time in the bond market. To its credit, CVSB navigated a tumultuous interest rate environment, returning nearly 5% year-to-date while amassing roughly $46.3 million in assets under management. Even better things could be in store for the ETF next year.
CVSB Could Be the Right Corporate Bond ETF in 2024
For the moment, market participants appear to be pricing in a sanguine climate for bonds in 2024. However, that could be subject to change and with no notice, indicating that CVSB’s quality traits could be advantageous next year for income investors.
“Corporate bond investments have posted some of the strongest returns in the fixed income universe so far in 2023, but it might be difficult to replicate that performance next year. Positive total returns seem likely, but excess returns — returns relative to Treasuries — might not be as high,” noted Collin Martin of Charles Schwab. “We continue to suggest an ‘up in quality’ theme, as we expect economic growth to slow, and as we outline in our broad 2024 outlook, the path of interest rates is likely to be a rocky road. The path of corporate bond yields should be a rocky road, as well.”
CVSB answers the quality call as all of its holdings carry investment-grade ratings, including roughly two-thirds with AAA, AA, or A grades. Another point to consider is that spreads between corporate bonds and Treasurys are narrowing, indicating that compensation for the added risk associated with the former is declining. That could be a sign that junk-rated corporates may be too risky if default rates continue trending higher. Fortunately, default risk is benign with CVSB.
“In line with rising defaults, there have been significantly more downgrades than upgrades in the high-yield market this year. Investment-grade corporate bonds have seen more upgrades than downgrades, but only by a slim margin. This trend may continue as rising borrowing costs tend to impact the lower-rated, highly leveraged companies more than those with investment-grade ratings,” concluded Martin.
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