Elected officials’ continued debate about the budget on Capitol Hill could spur additional interest rate cuts. Given these current market forces, fixed income investors may want to reposition their portfolios to attain corporate bond exposure.
Capital markets may wonder what the government shutdown risk could do to interest rate policy. If market strategists are correct, it appears the shutdown shouldn’t dim the prospect of further cuts.
“Our further lean into October – in spite of ongoing cautious language from Fed officials – reflects the even lower probability post-shutdown the Fed will get enough reassurance on labor market in time to rein in the soft default of successive cuts,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.
In the current yield environment, credit spreads have been tightening, which lowers the perceived risk tied to corporate bonds. With the forecast of a recession becoming less imminent heading into the fourth and final quarter of 2025, investors can ease any anxiety related to the fundamental soundness of corporate bonds.
For fixed income investors who already have a portfolio of safe haven Treasuries, corporate debt adds a dose of diversification while also adding more yield in a rate-cutting environment ahead. They can focus on maximizing yield as well as mitigating credit risk if they stick to investment-grade options. Additionally, more investors around the globe are turning to corporate bonds in search of yield as central banks begin to ease monetary policy.
Furthermore, an abundance of corporate bond deal making took place ahead of September’s rate cut, signaling the confidence of corporations in the current economy. The fresh supply of corporate bonds hitting the market creates opportunities for investors to get exposure, and one of the easiest ways is via exchange-traded funds (ETFs).
3 Corporate Bond Options
Vanguard has a suite of fixed income ETFs to cater to various corners of the bond market. When it comes to corporate debt in cost-effective passive funds, consider these three options. They address the short end, belly, and long end of the yield curve:
- Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH): tracks 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.
- Vanguard Interim-Term Corporate Bond ETF (VCIT): tracks the Bloomberg U.S. 5-10 Year Corporate Bond Index. That index includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies.
- Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT): 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 10 years.
All three of the aforementioned funds feature a low .03% expense ratio.
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