Prudence Still Necessary in Bond Market | ETF Trends

November was kind to fixed income investors as bonds posted their best month of 2023. High yield corporate debt participated in that rally as highlighted by the fact that the largest junk bond exchange traded fund is higher by nearly 4.3% over the past month.

Still, some bond market observers are cautioning investors to exercise prudence when it comes to credit risk. Often times, reducing credit risk means a corresponding cut to income, but investors can maintain high levels of income with the conservatively postured Calvert Ultra-Short Investment Grade ETF (CVSB). The actively managed fund is a mix of short-duration investment-grade corporate bonds and U.S. Treasurys and agency debt, meaning credit risk is benign.

CVSB’s status as an investment-grade fund could be appealing at a time when corporates default. Through October, there were 127 defaults in the U.S., a 13% uptick from the five-year average.

Why Bond ETF CVSB Matters Today

There’s no denying that junk bond funds have recently put together some impressive performances, stoking solid year-to-date gains. But there’s also no denying that potential treachery lurks in the corner of the bond market. CVSB is an example of an ETF that steers investors clear of problems.

“We expect HY defaults to trend higher over the remainder of the year, ending 2023 within a range of 4.5%-5.0%, due to higher burden of interest expense, tighter lending conditions and more limited capital access resulting from stress in the banking sector and inflation uncertainty. Defaults by issuer count were 2.8% in July, up from 2.6% in June, and we project them to end 2023 at 4.5%,” noted Fitch Ratings.

Even if the Fitch forecast proves accurate at 4.5%, it’d be more than triple the default rate seen last year and nine times the rate seen in 2021. That’s further validation of CVSB’s focus on high-quality credits and active management. Thatcould be a sign that CVSB managers can nimbly avoid investment-grade credit in danger of being downgraded.

Additionally, CVSB can be seen as a recession preparation. If economic contraction materializes in earnest, it will be high yield bonds that bear the brunt of the pain.

“And that rise of corporate defaults and bankruptcies between now and then adds to the list of headwinds that could knock the US economy into a recession. Firms struggling through bankruptcy or with heavy debt burdens could slash their workforces as they try to get back to financial health. It’s also a negative for asset prices, specifically, for high yield bonds and bank loans, which could bleed over into pain for stock prices as well,” reported Business Insider.

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