Not surprisingly, the Federal Reserve recently raised interest rates by another 25 basis points, taking borrowing costs to two-decade highs. Even with what appears to be an interest rate-induced headwind, corporate bonds are performing admirably this year. Broader gauges of both investment-grade and junk corporate debt are higher year-to-date.
With five months left in the year and the possibility of negative surprises, some bond market observers encourage focus on higher quality debt. That could be a boon for exchange traded funds such as the Calvert Ultra-Short Investment Grade ETF (NYSE Arca: CVSB).
With an emphasis on investment-grade debt, a 30-day SEC yield of 5.59% and a duration of just 0.66 years, CVSB could be an ideal bond ETF for investors seeking robust income while limiting their exposure to credit and interest rate risk.
Risks Afoot in Corporate Bond Market
CVSB should be viewed as a long-term instrument. Still, its near-term appeal is undeniable, particularly at a time when the corporate bond is far from risk-free.
“One such potential risk emanates from the rising wave of credit maturities from the corporate credit markets,” noted Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. “While company balance sheets, by and large, are in a good shape now, given how far interest rates have risen and how quickly they have done so, as that debt begins to mature and needs to be refinanced, it will happen at sharply higher rates. From now through the end of 2024, almost a trillion of corporate debt will mature. Sim ply by holding rates constant, that refinancing will represent a tightening of financial conditions.”
Two factors standout in terms of potential sparks for CVSB. First, economists are ratcheting up “soft landing” calls while dialing back recession expectations. Second, experts argue that investment-grade borrowers are currently better positioned to deal with macroeconomic headwinds than their junk-rated counterparts.
“Fortunately, a high proportion of the debt comes from investment grade borrowers and does not appear to be particularly challenging,” added Tirupattur. “However, below investment grade debt has a tougher path ahead for refinancing. As we continue through 2024 and get into 2025, more and more high yield bonds and leveraged loans will need to be refinanced.”
CVSB allocates 62.51% of its weight to corporate bonds with the remainder of the portfolio directed U.S. Treasurys and agency debt. As such, the ETF’s credit profile is exceptional. More than 63% of its holdings are rated AAA, AA or A.
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