With the downward pressure in bond prices, even the safest bets like benchmark Treasury notes and longer maturity bonds were susceptible to rising yields. Of course, a riskier debt like corporate bonds saw prices fall, but that risk can be diversified away by looking in the right places.
Nonetheless, risks remain for corporate bonds. With recessionary pressures percolating among investor sentiment, the same fears brought on by the pandemic are re-surfacing in the riskier bonds like corporate debt issues — the fear that credit defaults could result if the U.S. Federal Reserve continues to tighten rates en route to a recession.
“A new Federal Reserve gauge is showing moderate but rising signs of distress in trading of high-quality corporate bonds, reflecting investor jitters about a slowing economy,” a Wall Street Journal report said.
“The alert comes from a new measurement called the Corporate Bond Market Distress Index, or CMDI, which the Fed’s New York branch plans to update once a month,” the report added. “The first snapshot, offered Wednesday, shows greater strain for the roughly $5 trillion market for U.S. investment-grade corporate bonds, compared with historically low levels in newly released back-looking data from late last year.”
Of course, one market snapshot can vary with the next. Some market experts were taken aback that corporate bonds with high quality were showing signs of distress.
“From our seat, we are not feeling that the investment-grade market is showing much distress or liquidity concerns, at least not to the magnitude that this is highlighting,” said Anders Persson, head of Nuveen Global Fixed Income.
An Active Way to Corporate Bond Diversification
It’s hard to invest in the bond market without also thinking about yield. With a 4% 30-day SEC yield as of May 31, the American Century Diversified Corporate Bond ETF (KORP) offers yield while also adding diversification in holdings of mostly investment-grade quality.
The fund seeks current income by emphasizing investment-grade debt while dynamically allocating a portion of the portfolio to high yield. Per its product website, KORP creates a systematically managed portfolio that integrates fundamental and quantitative expertise that:
- Adjusts investment-grade and high yield components to balance interest rate and credit risk
- Screens individual credits to seek those with sound fundamentals, reduced default risk, attractive valuations, and liquidity
- Adjusts industry and duration exposures as risks and opportunities emerge
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