A record month of issuance in January and still relatively high yields could be prime drivers of demand for corporate debt in the current market environment. With that, an all-encompassing approach to corporate debt is available in the Vanguard Total Corporate Bond ETF ETF Shares (VTC).
The expectation of lower interest rates in the future is spurring corporations to take on more debt now and anticipate refinancing later when rates decrease. The Federal Reserve has been keen on keeping interest rates where they are until economic data confirms the next move will be to cute rates. Until then, companies are issuing debt at a higher clip than in previous years.
“Blue-chip firms have sold $188.57 billion of bonds in the US in January, setting a record for the month, as companies look to take advantage of drops in longer-term borrowing costs,” confirmed a Bloomberg report.
Another reason for record issuance in January is simply a fresh start to 2024.
“Big companies typically issue debt to finance projects like expansions, new hiring and mergers,” the Bloomberg report said, adding that “January is usually a busy time in the corporate bond market, when treasurers are thinking, new year, new me, new debt on the balance sheet.”
Fortunately, demand for corporate debt is also meeting supply as the anticipation of rate cuts could be spurring fixed income investors to take advantage of attractive yields now before rate cuts arrive. The window of opportunity could remain open for some time, as it doesn’t appear the data-dependent Fed will cut rates swiftly and often.
“We always say that supply follows demand. And demand is very strong, which means corporate issuers are going to take advantage of that,” noted Winnie Cisar, global head of strategy at CreditSights.
Take Advantage of Yields Now
With the expectation that yields will eventually fall, now could be an opportune time to add corporate debt to a bond portfolio. VTC seeks diversification by including debt with a variety of maturity dates. It focuses on investment-grade bonds to minimize credit risk. As of February 9, the fund has a 30-day SEC yield of 3.84%. It also sports a low expense ratio of 0.04%.
VTC employs an indexing investment approach designed to follow 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.
For more news, information, and strategy, visit the Fixed Income Channel.