Corporate bonds, both investment-grade and high-yield fare, are among the best-performing fixed income segments this year. That’s the good news. But some investors might worry they’ve missed out on easy gains or the asset class is too frothy on valuation.
Some experts see things differently. And those sanguine views may imply there’s more upside in store for ETFs like the Neuberger Berman Flexible Credit Income ETF (NBFC ). Being an actively managed fund could make it a prime avenue for corporate bond exposure in the months ahead. That’s because there are concerns about corporate bond valuations. Active funds, such as NBFC, can more readily adjust portfolios to take advantage of valuation opportunities. That feature is not typically found with passive corporate debt ETFs.
“The gap between yields on blue-chip company debt and US Treasuries, a key valuation metric for corporate credit known as the spread, has hovered around 0.73 percentage point for much of the last week. That’s close to levels last seen in the 1990s,” reported Bloomberg.
Green Shoots Abound for NBFC
Despite the torrid pace set this year by company-issued bonds, there’s still a solid case for ETFs like NBFC. That includes that the aforementioned elevated valuations can be interpreted that issuers are confident they can service outstanding obligations.
Additionally, some bond market observers believe one reason valuations on corporate bonds moved higher is because of the ongoing government shutdown. That implies when that situation resolves, these bonds, perhaps including some NBFC holdings, could see valuations come in a bit.
Then there’s the safety factor. Perhaps surprising to some investors is that some market participants are currently viewing investment-grade corporate bonds, which are included in the NBFC portfolio, as comparable or superior to Treasuries from a safety perspective.
“Treasuries look so much riskier that some on Wall Street are questioning whether they remain the best benchmark for corporate bonds. Investors looking to remove some political and government factors from the equation have been using interest-rate swaps as a reference rate, according to JPMorgan Chase & Co. Swaps are interest-rate derivatives widely used by banks and companies,” noted Bloomberg.
Add it all up and there’s arguably good reason why corporate bonds look pricey. And those reasons don’t dent the case for NBFC.
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