Corporate Bond ETFs Could Strengthen after Biden's Pension Bailout

Tight credit spreads might be keeping many fixed income investors from heading into corporate bonds, but funds like the Vanguard High Dividend Yield ETF (VYM) could benefit from a pension bailout.

“U.S. President Joe Biden’s pension bailout might do more than just support troubled retirement plans,” a Bloomberg article said. “It could also spur tens of billions of dollars in demand for corporate bonds with the lowest investment-grade ratings, according to Citigroup Inc.”

“Struggling multi-employer pensions, which are often tied to unions, will be able to apply for special financial assistance, thanks to the $1.9 trillion pandemic-relief bill signed into law in March,” the article added. “Pension Benefit Guaranty Corp., which insurers the plans, will make a single lump-sum payment to eligible funds.”

VYM seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that are characterized by high dividend yield. The fund employs an indexing investment approach designed to track the performance of the FTSE High Dividend Yield Index, which consists of common stocks of companies that pay dividends that generally are higher than average.

The adviser attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The fund also comes with a low expense ratio of 0.06%.

VYM features:

  1. Seeks to track the performance of the FTSE High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.
  2. Provides a convenient way to track the performance of stocks that are forecasted to have above-average dividend yields.
  3. Follows a passively managed, full-replication approach.

VTC Chart

Extracting Extra Yield

As mentioned, tight credit spreads may have been keeping investors from piling into riskier debt if safe haven government bonds had been offering similar yields. With a global vaccine deployment, fixed income investors may be more willing to take on riskier debt, and now, they get another tailwind with the pension bailout.

“The strategists said pension managers may try to extract as much yield as possible by loading up on bonds in the lowest investment-grade rung, which yield 2.46% on average, versus 2.23% for the broader market,” the Bloomberg article said. “Existing funds could get reallocated into riskier investments like stocks, they added. But in credit, the new demand may entice companies rated BBB to issue longer-dated paper than they usually do and flatten the curve for bonds maturing in 10 years and 30 years even further.”

“If there was ever a time when 30-year credit should be having its moment in the sun, it’s now,” strategist Daniel Sorid said.

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