Despite the elevated volatility as a result of slowing economic growth and uncertainty over the Federal Reserve rate hike, investors may still find value in some fixed-income assets and related exchange traded funds.
For instance, Russ Koesterich, global chief investment strategist and head of the model portfolio & solutions business at BlackRock, still favors a portfolio tilted toward select credit, tax-exempt bonds and inflation protection through Treasury Inflation Protected Securities.
“We also maintain a preference for credit within fixed income,” Koesterich said. “Despite the equity market volatility, high yield has stabilized over the past week and yields remain attractive.”
For instance, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) has a 6.75% 30-day SEC yield and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) has a 6.57% 30-day SEC yield. HYG has an effective duration of 4.13 years and JNK has a 4.3 year duration.
In contrast, 5-year Treasury bond yields are hovering around 1.55% and the benchmark 10-year yield is at about 2.23%.
Koesterich also mentioned that investment-grade corporate debt also looks cheap, but the strategist advises investors to hold off until later this fall due to the pending supply.
Investment-grade-rated debt issuers have halted sales in August as a response to the sudden spike in volatility and uncertainty over a potential September Federal Reserve rate hike, reports Cynthia Lin for the Wall Street Journal.
“To think August was supposed to have been a massive month, [the lull]suggests there’s an issuance wall waiting in the wings,” CRT Capital bond strategist David Ader told the WSJ.
Invesco also projected a record-breaking amount of supply to hit the market between Labor Day and the Fed’s September 17 policy announcement, anticipating about $80 billion in investment-grade offerings to hit the market. The sudden influx of supply could weigh on market in the short-term.
Year-to-date, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), which has a 3.59% 30-day SEC yield, dipped 0.9% and Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT), which has a 3.53% 30-day SEC yield, was up 0.6%.
Tax-exempt bonds also offer compelling yields relative to taxable fixed-income assets of the same maturity, Koesterich added.
For instance, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), which has a 4.73 year duration, comes with a 1.75% 30-day SEC yield or a 3.09% taxable equivalent 30-day SEC yield for those in the highest income bracket. The SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI), which has a 7.65 year duration, shows a 2.07% 30-day SEC yield or 3.65% taxable equivalent yield. The Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM), which has a 7.15 year duration, comes with a 2.29% 30-day SEC yield or a 3.8% taxable equivalent 30-day SEC yield.
Lastly, while BlackRock remains cautious of U.S. Treasuries, Koesterich pointed to TIPS as an alternative for fixed-income exposure and a potential hedge against inflation. For instance, the iShares TIPS Bond ETF (NYSEArca: TIP) tracks government bonds whose face value are adjusted based on Consumer Price Index, so the ETF helps protect against intermediate-term inflation.
For more information n the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.