The higher-for-longer interest rate narrative continues to play out as the U.S. Federal Reserve opted to once again keep rates unchanged. Rather than wait for interest rate cuts, some companies are opting to simply offload debt, which could be a boon for corporate bonds.
Jettisoning debt now, especially debt accumulated with high rates, can help improve a company’s bottom line with the lighter service costs. Apparently, a lot of companies with higher credit quality are going this route, per a Wall Street Journal report.
“Today’s environment is a strong incentive to deleverage,” said Viktor Hjort, global head of credit strategy at BNP Paribas, in the report. “Especially for the higher quality companies.”
The WSJ report mentioned that this offloading is a net positive for prospective investors eyeing corporate debt as an option to diversify their fixed income portfolios. This is especially the case for investment-grade corporate debt that can offer a balance of yield and higher credit quality.
“It reduces risk, it probably improves ratings over time,” Hjort said. “It can reduce bond supply over time as well. So all of these things sort of makes broad investment-grade corporate credit attractive.”
Given this, one option to consider is the Vanguard Total Corporate Bond ETF Shares (VTC). It seeks to track the performance of the Bloomberg U.S. Corporate Bond Index, which measures the investment-grade, fixed-rate, taxable corporate bond market. The index includes U.S.-dollar-denominated securities publicly issued by industrial, utility, and financial issuers. Its 30-day SEC yield is at 4.04% as of April 30.
The Long and Short Corporate Options
Fixed income investors looking to attain more yield can step out further on the yield curve with corporate bonds carrying a longer maturity date. That said, an option to consider is the Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT). Also as of April 30, VCLT’s 30-day SEC yield is 5.83%.
The fund tracks the performance of the Bloomberg U.S. 10+ 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 greater than 10 years.
To mitigate rate risk in the interim, investors can opt for shorter-term debt using the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH), which has a 30-day SEC yield of 5.39%. The fund seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. It employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index.
For more news, information, and analysis, visit the Fixed Income Channel.