The scramble for attaining higher yields before central bank rate cuts doesn’t mean investors aren’t exercising due diligence. In fact, they’re eschewing risky debt and opting for higher-quality options, according to the Financial Times.
The move comes amid an increased number of bankruptcy filings as debt service costs remain elevated in the current high-interest-rate environment. As such, a number of traders are reducing their exposure to risky corners of the debt market.
From a technical standpoint, the disparity in yields is showing up between BB-rated and CCC-rated debt. There’s increasing concern that companies saddled with heavy debt cannot continue operating with high borrowing costs.
“The gap in borrowing costs between companies rated triple-C and lower — the lowest rungs of the $1.3tn US junk bond market — and double-B — the highest rung — has surged to almost its widest level since May last year, according to Ice BofA data, as investors seek safer names,” the FT article explained.
As the expectation of rate cuts gets pushed farther out, the gap between these two debt ratings could widen further as debt service costs mount. According to Torsten Slok, chief economist at investment firm Apollo, this is “a reflection of worries about the cocktail of higher for longer and the risk of a recession, which would ultimately be of course very bad news for the most highly levered companies.”
Core, Investment-Grade Options
Investors looking for yield and core bond exposure who want to stay within the confines of investment-grade debt can consider passive and active options from Vanguard.
For a passive option, investors should opt for the Vanguard Total Bond Market Index Fund ETF Shares (BND ). It seeks to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Index. That index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the U.S., including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year.
An active option to consider is the Vanguard Core Bond ETF (VCRB ), which can be beneficial with its added market flexibility. The ETF mitigates credit risk via diversified exposure to the U.S. investment-grade bond market. However, the actively managed VCRB also extends its exposure to other fixed income assets for diversification, including mortgage-backed securities and corporate securities. The fund harnesses the portfolio management capabilities of the Vanguard Fixed Income Group at a low 0.10% expense ratio.
For more news, information, and analysis, visit the Fixed Income Channel.
