Short-Term Corporates Could Be Right Idea for a Volatile Bond Market

Not much is working in the bond market this year, but the upside of all that downside is that some attractive opportunities are emerging, particularly among lower duration fare.

Importantly, that doesn’t necessarily mean investors have to sacrifice income in the name of reducing interest rate sensitivity within their portfolios. Short-term corporate bonds can help investors boost their income profiles while mitigating rate risk and the asset class is accessible via an array of exchange traded funds, including the  SPDR Portfolio Short Term Corporate Bond ETF (NYSEArca: SPSB).

The $7.08 billion SPSB follows the Bloomberg U.S. 1-3 Year Corporate Bond Index. Home to 1,200 bonds, the ETF delivers the goods in terms of lower rate risk as highlighted by an option-adjusted duration of just 1.89 years, according to issuer data. In other words, SPSB is a highly relevant consideration among fixed income ETFs in the current environment.

“The sharp rise in interest rates has significantly benefited short-term investment-grade (IG) corporate bonds, as they now yield over 5% for the first time since the Great Financial Crisis (GFC) — 225 bps above the 20-year average yield,” noted Matthew Bartolini, head of SPDR Americas Research. “Yet the duration of short-term IG corporates has remained relatively flat (currently 1.95 years) given the maturity band focus. This has led to a vastly improved yield-per-unit-of-duration payoff of 2.6 — a higher rate than any other part of the Treasury or IG corporate credit curve. In fact, their yield-per-unit-of-duration of 2.6 registers in the 99th percentile post-GFC.”

SPSB also answers the bell when it comes to income. Due to the savage repudiation of the broader bond market this year, even high-quality, lower-duration bonds are sporting surprisingly higher yields. That’s the case with SPSB as highlighted by the ETF’s 30-day SEC yield of 5%.

In more sanguine market climates, it’s next to impossible to find a bond ETF with a duration of less than two years with nearly half its holdings rated AAA, AA, or A sporting a yield of 5%. Plus, investors can access those perks at one of the lowest fees in the category.

“SPSB represents a potentially high-quality value opportunity to pick up yield without taking on any additional duration or credit risk relative to other popular IG markets, and relative to their historical average. And with a TER of 4 bps, SPSB is cheaper than 95% of its peers and 50 bps cheaper than the median short-term bond fund,” concluded Bartolini.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.