With the expectation that the Federal Reserve will continue to cut interest rates, corporations proceeded to issue more bonds in Q3. Given this, fixed income investors have options, including three from Vanguard.
Easing monetary policy could also allow corporations to refinance their current debt to lower interest rates, thereby reducing their debt service. This may have helped embolden companies to continue issuing debt as the Fed tries to land the economy to a soft landing. That assumption may have manifested itself in more Q3 issuance.
“Fixed income issuance posted another strong quarter at $2.9T, +16.1% Q/Q and +57.0% Y/Y,” noted the Securities Industry and Financial Markets Association (SIFMA) in a report. “This was the fourth consecutive quarterly increase in issuance with four out of six covered asset classes posting positive Q/Q trends: ranging from +10.3% to +37.7%.”
If investors want to keep duration on the short side, an option to ponder is the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH ). It offers investors a way to park cash temporarily while obtaining the yield opportunities that corporate bonds can offer. In this particular case, the 30-day SEC yield on VCSH stands at 4.63% as of Nov. 4.
VCSH 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.
Intermediate and Long-Term Options
Intermediate bonds offer a middle-of-the-road option to balance yield and rate risk. For fixed income investors wanting intermediate exposure to corporate bonds, consider using 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. It has maturities of between five and 10 years. As of Nov. 4, its 30-day SEC yield is 5.05%.
With a 30-day SEC yield of 5.61% (also as of Nov. 4), investors can opt for longer-term debt — albeit more rate risk — with 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 10 years.
All three funds feature a low expense ratio of 0.04%, making them cost-effective alternatives for corporate debt exposure.
For more news, information, and analysis, visit the Fixed Income Channel.
