The demand for corporate bonds is extending beyond the need for yield. As credit quality conditions improve for corporate bonds, they also offer credit risk mitigation in tandem with higher yield versus safe haven government debt.
It’s an opportune time to take advantage of this balance between yield and quality now ahead of looming interest rate cuts.
“Investment-grade corporate credit isn’t the risk it once was, as the market’s share of single A bonds nears a decade high, Bloomberg reported,” a Markets Insider report stated, noting that as of late February, “A-rated debt now makes up 43.54% of the global high-grade credit market, referring to bonds that are triple B or higher. The last time single A debt made up this much of the market was in early 2015, Bloomberg data shows.”
The report noted that this current corporate bond environment is a normalization after a period of low interest rates prior to the pandemic. That caused investors to take on more credit risk in order to extract more yield, but that’s no longer the case, as they can get both in the current market.
To get broad-based corporate bond exposure that offers diversification while striking a balance between yield and credit quality, one fund worth considering is 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. The fund features a low 0.04% expense ratio and, as of March 31, a 30-day SEC yield of 4.04%.
A Rate Risk and Yield-Focused Option
To mitigate rate risk, investors may want to opt for debt with shorter maturity dates. With a 0.04% expense ratio, one fund to consider is the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH). 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.
With a 5.61% 30-day SEC yield as of April 4, a more yield-focused option to consider by stepping further out on the yield curve is the Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT). The fund also features a low 0.04% expense ratio and 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 ten years.
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