Companies Scramble to Issue More Bonds Ahead of More Rate Hikes

A hawkish Federal Reserve is forcing companies to issue more bonds ahead of rising interest rates in the current inflationary environment. As such, a deluge of corporate bonds is expected to hit the debt market.

“Companies with the highest credit ratings in the world are engaged in a now-or-never U.S. dollar bond issuance spree to get ahead of a continued spike in borrowing costs and as liquidity in the market is expected to dwindle in the next few months,” Reuters reported. “The first working day after a long holiday weekend saw 19 investment-grade rated companies raise $35.35 billion, the most to price in a single day this year, according to IFR/Refinitiv.”

Moreover, it’s been a tough year for the bond market with inflation fears tamping down demand. As such, companies are looking to issue more bonds now if investment demand for debt dwindles with more rate hikes to come.

“There is a strong motivation to issue debt now rather than later because there are concerns that investment liquidity will be materially reduced as we near the end of a year that has yielded poor returns for investors,” said Jessica Lehmann, head of U.S. debt syndicate at HSBC.

2 Options for Corporate Bond Exposure

Vanguard has a pair of low-cost options for investors when it comes to getting corporate bond exposure. For a broad, all-inclusive option, consider the Vanguard Total Corporate Bond ETF ETF Shares (VTC).

The fund seeks to track the performance of a broad, market-weighted corporate bond index. VTC is a fund of funds, and employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Corporate Bond Index, which measures the investment-grade, fixed-rate, taxable corporate bond market.

The index includes U.S. dollar-denominated securities that are publicly issued by industrial, utility, and financial issuers. The fund comes with a low expense ratio of 0.05%.

VTC offers:

  1. Performance tied to the Bloomberg Barclays U.S. Corporate Bond Index.
  2. Broad, diversified exposure to the investment-grade U.S. corporate bond market.
  3. A unique ETF of ETF structure.
  4. An intermediate-duration portfolio with exposure to short-, intermediate-, and long-term maturities.
  5. Current income with high credit quality.

For more strategic exposure, especially with the prospect of more rate hikes, getting short duration is an ideal option. As such, another fund to consider is the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH).

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 track the performance of the Bloomberg Barclays 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.

For more news, information, and strategy, visit the Fixed Income Channel.