For a significant period of time, positive economic news — be it inflation or employment data and more — was considered a negative for bonds. Corporate debt was part of that trend.
It’s easy to understand why some constructive economic data points have not benefited bonds. As just two examples, if inflation cools and employment remains sturdy without the assistance of interest rate cuts, the Federal Reserve may not rush to pare rates. The good news is that that could support the outlook for ETFs such as the WisdomTree U.S. Short Term Corporate Bond Fund (SFIG ).
SFIG posted a modest gain in June — a month in which economic data was mostly encouraging. One month of performance isn’t the appropriate timeline on which to judge fixed income strategies. But last month could be encouraging because it shows corporate debt is reacting positively to good news.
SFIG Could Benefit From Altered Thinking
There have been times when bad news was perceived as good. That’s because the prevailing thesis was that challenging data would encourage central banks to take steps that were to the liking of bond investors. Some experts believe that thinking is changing. That could be constructive for assets such as SFIG.
“Central to this idea that bad data would be better for the market is the assumption that central banks would look at any poor data, change their tune and come to the market’s aid by lowering interest rates quickly. I think recent events really challenge that sort of thinking,” noted Andrew Sheets, head of corporate credit research at Morgan Stanley.
He also pointed out that, over time, bad news rarely encourages gains for corporate bonds. Typically, the opposite is the result. So investors considering SFIG shouldn’t be rooting against the U.S. economy.
“Over a long swath of available data, the worst returns for credit have consistently overlapped with the worst economic growth. Hoping for weaker data is, historically speaking, playing with fire, raising the odds that such weakness isn’t just a blip, and opens the door for much worse outcomes for both the economy and credit,” observed Sheets.
The economy could suddenly turn weak or interest rates could remain higher for longer. SFIG has some avenues for potentially buffering against those scenarios. For example, the ETF’s duration is just 2.62 years and over 47% of its holdings are rated AAA, AA, or A.
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