U.S. companies are taking advantage of easier financial conditions by issuing billions in debt. Citing data from Dealogic, the Financial Times is reporting that companies have issued $63.7 billion in U.S.-marketed debt in the first week of the new year — most of it investment-grade. This is well above the $36.6 billion in corporate debt U.S. companies issued in the last five weeks of 2022.
This is after the Federal Reserve has raised interest rates to a range of 4.25% and 4.5%. And while the cost of borrowing is significantly higher than it was a year ago, it has dropped since peaking in October.
Despite having declined in recent months, inflation is still well above the Fed’s target inflation rate of 2%. So, the U.S. central bank is expected to continue to raise rates (the FOMC has stated as much). Investors are betting, however, that interest rates will peak at roughly 5% in June, which would bring down yields on corporate debt.
So, with yields for highly rated corporate debt currently high and default risk low, income investors may want to consider investment-grade corporate bonds. That’s where the Vanguard Short-Term Corporate Bond ETF (VCSH) can come into play.
VCSH seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to follow the performance of the Bloomberg U.S. 1-5 Year Corporate Bond Index.
This index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between one and five years. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.
VCSH carries an annual expense ratio of just 0.04%.
For more news, information, and analysis, visit the Fixed Income Channel.