The August 5 sell-off may have spooked investors from riskier assets, but tightening credit spreads between high-quality and high-risk bonds shows that investors may be returning to corporate bonds again.
A weak July jobs report sparked recession fears, spurring a flight to safe haven assets like Treasuries. Rattled fixed income investors may have left the corporate bond arena as a result. Prior to this, corporate bonds were rallying ahead of the sell-off, attracting the attention of investors seeking yield and willing to take on additional credit risk as macroeconomic conditions improved.
Even as the expectation of rate cuts were forthcoming, the prospect of lower rates would mean that corporations would have less debt service costs, translating to stronger fundamentals. The sell-off during the first week of August could be a minor blip on the radar screen, and fixed income investors could be flocking back to corporate bonds in droves.
“Recent data has given the market more comfort around the likelihood of more accommodative policy at the next FOMC meeting, and this has given investors increased confidence that a substantial rise in rates is less likely,” said Blair Shwedo, head of fixed-income sales and trading at U.S. Bank.
Investors who are still reticent about where rates are headed can opt for short-term debt exposure. For corporate bonds, this is available with the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH ).
The fund seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. It employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index.
Long and Intermediate Options
Fixed income investors willing to take on more rate risk to maximize yield should consider the Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT ). The fund tracks the performance of the Bloomberg U.S. 10+ Year Corporate Bond Index. This index includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies with maturities greater than ten years.
Finally, for a middle-of-the-road solution that balances between yield and rate risk, an intermediate corporate bond offering is available with the Vanguard Interim-Term Corporate Bond ETF (VCIT ). This fund tracks the Bloomberg U.S. 5-10 Year Corporate Bond Index. That index includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies.
For more news, information, and analysis, visit the Fixed Income Channel.
