Corporate Bonds See Heightened Interest Ahead of Rate Cuts

A flurry of investor interest is taking place in the corporate bond market. As the central bank reiterated its intention to institute rate cuts after a recent pause, investors could be scrambling for more yield before that proverbial window of opportunity closes.

In the post-meeting press conference after staying put on rates, Federal Reserve chairman Jerome Powell confirmed that rate cuts will happen just as long as economic data corroborates with their 2% target inflation rate. Of course, the Fed didn’t set a specific timeline, leaving the capital markets to ponder when rate cuts will eventually happen.

“We believe our policy rate is likely at its peak for this tightening cycle,” and the Fed “will likely begin dialing back policy restraint some point this year,” said Powell.

In the meantime, record issuance in the corporate bond market is being met by record demand. As the anticipation of yields falling builds, investors have been quick to snatch up corporate bond exposure.

“A record amount of money has flooded into US corporate bond markets this year, as investors rush to lock in the highest yields in years ahead of an anticipated series of interest rate cuts by the Federal Reserve,” confirmed the Financial Times. “Inflows into corporate bond funds have reached $22.8bn so far in 2024, according to fund tracker EPFR, the first positive start to a year since 2019, when $22.4bn had flowed in by this point.”

For broad corporate bond exposure, consider the Vanguard Total Corporate Bond ETF ETF Shares (VTC). The fund 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.

Attain More Yield With Longer Maturities

Investors looking to step out further on the yield curve to attain more yield can look to bond funds that focus on debt with longer maturity dates. That said, consider the Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT). The fund seeks to track the performance of a market-weighted corporate bond index with a long-term dollar-weighted average maturity.

The fund, which also features a low 0.04% expense ratio and a 30-day SEC yield of 5.57% as of March 21, employs an indexing investment approach designed to track 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.

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