Investors Are Piling into High-Quality Corporate Bonds at a Record Pace

As yields rise in tandem with interest rates, corporate bonds are looking attractive to fixed income investors. A record number of them are piling into corporate bonds, particularly those of the highest quality.

It’s a solid move, considering that there are still a number of wild cards in the market, especially with respect to monetary policy at the hands of the U.S. Federal Reserve. Too much tightening could spin the economy into a recession, potentially souring the taste for the riskiest bonds.

“Investors are piling into high-quality corporate bonds this year at a record rate, reflecting their enthusiasm for an asset class that is typically seen as relatively low risk but now offers the best returns in years,” a Financial Times article noted. “A total of $19bn has poured into funds which buy investment grade corporate debt around the world since the start of 2023, the most ever at this point in the year, according to data from fund flow tracker EPFR.”

The article mentioned that investors are chomping at the bit to lock in high yields now. This comes after last year’s bond market suffered heavy downward selling pressure as inflation fears roiled many asset classes.

“People basically think that fixed income in general looks a lot more attractive than it has in prior years,” according to Matt Mish, head of credit strategy at UBS. “The euphoria around investment grade is basically more broadly this euphoria around yields,” he added. “At least relative to last year and really relative to most of the last decade, [high-grade corporate debt] is offering yields that are considerably higher.”

Get Short-Term Exposure to Corporate Bonds

Getting short-term exposure in the interim is still a common refrain in the bond market. The Fed acknowledged it will take some time in order to tamp down inflation, so a short duration strategy is a solid bet in corporate bonds.

That said, consider the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH), which 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.