2022 was a historically bad year for fixed income, with bonds having their worst annual performance since Morningstar created its fixed income indexes. But now that we’re in 2023, higher interest rates and wider credit spreads have driven up yields, particularly for corporate debt.
There’s an expectation that the Federal Reserve will ease up on its tightening cycle (buttressed by the Fed raising interest rates by 25 basis points today, far lower than its previous rate hike of 50 bps and several 75 bps rate bumps prior to that), and that the predominance of rate increases in the long end of the curve is in the rearview mirror.
Many analysts expect the U.S. economy to be stagnant in the first half of the year and enter a recession at some point in 2023. A stagnant economy may put pressure on corporate credit spreads in the first half of 2023. But Morningstar’s Dave Sekara believes this pressure to be short-lived.
“Over the next few months, the corporate bond market may encounter some choppy waters, but we expect seas to be calmer thereafter,” Sekara wrote. “For investors that can ride out a potential short-term squall, we find value in the credit spread and high all-in yields that corporate bonds… provides.”
While bankruptcies and defaults are an obvious concern in a recession, they shouldn’t see a noticeable spike, because most companies have extended their debt maturities over the past year (so refinancing maturing debt won’t be an insurmountable issue). After hitting record lows in 2021, interest rates for corporate bonds have risen well above their 10-year averages. The yield on the Morningstar US Corporate Bond Index is 5.16%.
The Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT) seeks to track the performance of a market-weighted corporate bond index with a long-term dollar-weighted average maturity. The fund, which features an expense ratio of 0.04%, 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.