At a time when investors are thirsty for safe, income-generating assets, it is not surprising that investment-grade corporate bond exchange traded funds are adding assets at a rapid rate this year. Yields on investment-grade U.S. corporate bonds have declined. However, corporate bond yields remain much more attractive. For instance, interest rates on 7-to-10 year bonds of high-quality U.S. companies are 3.14%, compared to 3.92% a year ago.
Currently, credit spreads are falling. Looking at corporate bonds, the diminish spread between government Treasury yields and corporate debt yields reflects investors’ lower perceived risks ahead.
The ongoing low-yield environment and improving economic sentiment has helped push investors toward corporate debt. However, potential investors should be aware that corporate bonds have historically exhibited grater volatility than U.S. Treasuries due to the increased volatility in corporate cash flows and credit risks, along with greater liquidity risks.
The Vanguard Short-Term Corporate Bond Index Fund (NYSEArca: VCSH) is a popular option for investors looking for a steady, inexpensive avenue to corporate bonds without significant interest rate risk.[related_stories]