With high yields in the current bond market environment, it was easy to get lured into risky debt despite the credit risk. Now, investors could be shifting to safer debt, which could outperform once the Federal Reserve starts cutting interest rates.
Per a Barron’s article, junk bonds attracted investors in the first half of this year. As we get deeper into the second half of 2024, investors might consider focusing more on credit quality and less on yield.
According to the article, this might run counter to convention, as companies in distress should benefit from lower interest rates due to decreased debt servicing costs. However, investment-grade debt, especially those with longer maturities, can offer benefits in the long-term horizon.
“When bond yields come down, prices rise,” Barron’s noted. “And prices on longer-dated bonds rally the most because these allow investors to lock in prevailing interest rates for longer.”
Barron’s also mentioned that investment-grade debt tends to carry longer maturities. As such, lenders are “happy to let blue chips hold their cash for years,” but are naturally more cautious to lend to companies with higher default risk, making it more difficult for those companies to borrow money in the long term.
“If we do get a decline in interest rates, then investment grades could easily outperform,” said DataTrek co-founder Nicholas Colas in an interview. “Even though high-yield bonds have higher coupons, duration is what drives rate sensitivity.”
2 Long-Term Investment Grade Options
Investors looking to reap the benefits of long-term investment-grade debt may want to consider a pair of options from Vanguard. On one hand, there’s the Vanguard Long-Term Bond ETF (BLV ). It seeks to track the performance of the Bloomberg U.S. Long Government/Credit Float Adjusted Index. It includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds with maturities of greater than 10 years and that are publicly issued.
Alternatively, for investors wishing to stay within the safe confines of U.S. Treasury debt, the Vanguard Long-Term Treasury ETF (VGLT ) is the fund to consider. It tracks the performance of a market-weighted Treasury index with a long-term dollar-weighted average maturity. VGLT employs an indexing investment approach designed to track the performance of the Bloomberg U.S. Long Treasury Bond Index. That index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities greater than 10 years.
For more news, information, and analysis, visit the Fixed Income Channel.
