As highlighted by a year-to-date gain of 5.12% by the Markit iBoxx USD Liquid Investment Grade Index, investment-grade corporate debt has been one of the better-performing corners of the bond market. Some experts believe the theme will continue in the coming months.
Should that thesis prove accurate, advisors and investors could examine exchange traded funds such as the VanEck Moody’s Analytics IG Corporate Bond ETF (MIG ). MIG, which follows the MVIS® Moody’s Analytics® US Investment Grade Corporate Bond Index, may be worth a look. The ETF is up 2.42% over the past month and hit a 52-week high last Friday.
These are impressive and relevant data points to be sure. Still, MIG could prove worthy of consideration beyond just the next few months. This is true even with the Federal Reserve readying interest rate cuts, the first of which could arrive this month.
Corporate Bonds & MIG Relevance Rising
A rate cut this month could be important to MIG and its brethren for another reason: as Andrew Sheets, head of Corporate Credit Research at Morgan Stanley, points out, September is often a trying month for corporate bonds. Fortunately, MIG’s recent price action suggests the ETF is contending with that rough seasonality and winning.
That could be attributable to the ETF’s methodology, which is relevant beyond dealing with seasonality that isn’t guaranteed to repeat. What makes MIG potentially attractive to asset allocators is its index construction. It focuses on attractively valued bonds that are at reduced risk of being downgraded. That lower probability of downgraded is important. More than 50% of MIG’s holdings carry one of the three BBB ratings, meaning downgrades could take them into junk territory.
Predictably, the macroeconomic outlook and the Fed’s ability to manage already cooling inflation figure prominently into the equation for any corporate bond ETF, including MIG.
“If the economic data can hold up for the next few months, while the Fed does make those first gradual rate cuts, it will help reassure markets that monetary policy is reasonable and in-line with the underlying economy. But if the data weakens more now, the market is vulnerable,” observed Sheets. “Monetary policy works with a lag, meaning rate cuts are not going to help anytime soon. And so it becomes easier for the market to worry that growth is slowing too much, and that the cavalry of rate cuts will be too late to arrive.”
He added that the upcoming presidential election could cause some jitters in the corporate bond market. However, that will be a temporary scenario.
For more news, information, and analysis, visit the Beyond Basic Beta Channel.
