Market uncertainty is also spilling over into bonds. But fixed income investors can opt for corporate bonds if they’re looking to maximize yield opportunities without sacrificing too much credit risk.
The uncertainty has been evident in the widening spread between U.S. corporate bonds and safe haven Treasuries, as noted in Reuters. Macroeconomic factors like interest rates as well as geopolitical risks like trade wars are all adding to the uncertainty amid a broad equities market sell-off in February. The widening spread could be of concern, especially if it’s signaling a potential recession.
“If credit spreads continue to widen much more from here, I think it tells you that the market is starting to price in a high chance of a recession,” said Priya Misra, portfolio manager at JP Morgan Asset Management.
This bodes well for safe haven Treasuries, but it doesn’t mean investors need to shun corporate bond exposure completely. For a balance between credit risk and yield, staying in investment-grade corporate bonds is a more compelling option as opposed to staying in the riskiest debt.
Despite the uncertainty, corporate profits have been trending higher. And if the Federal Reserve resumes cutting interest rates, this could be another potential market catalyst. Nonetheless, fixed income investors may still want to play defense with interest rate policy still a factor. That said, short-term bonds continue to be an ideal option in the current macroeconomic climate.
One fund to consider is the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH ). It 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.
2 More Options in Corporate Bonds
For fixed income investors who don’t mind taking on more rate risk to maximize yield, the Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT ) presents a compelling option. 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 10 years.
If short- or long-term bonds aren’t an ideal solution, investors can opt for a median solution to corporate bond exposure via intermediate bonds. These bonds allow investors strike a balance between yield and rate risk, which is available in 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.
All three of the aforementioned funds feature a low .03% expense ratio.
For more news, information, and analysis, visit the Fixed Income Channel.
