Bond yields and real yields recently traveled a long way in short order, spooking bond market participants, but some experts believe opportunity remains in some corners of the bond space. Investment-grade corporate credit is part of that conversation.
Should that outlook be validated, exchange traded funds, including the WisdomTree U.S. Short Term Corporate Bond Fund (SFIG), stand to benefit. SFIG, which follows the WisdomTree U.S. Short Term Corporate Bond Index, currently sports a 30-day SEC yield of 5.52%. That’s stout for a low-duration bond fund with strong credit quality.
Alone, that yield could stir fresh interest in SFIG, which is more than seven years old. However, SFIG could be an appropriate bond ETF consideration today for reasons beyond its tempting income stream.
SFIG Solid Attributes
Interest rates and quality are among the factors that could bolster the near to medium case for SFIG.
“While the market has been going against our current call for government bond yields to fall over the next 6 to 9 months or so, we’re steadfast on our preference for high-quality fixed income over risk assets like global equities, like high-yield corporate bonds. And the reason really comes down to how higher real yields mean the discount rate for equities is also higher, leading to lower stock prices,” noted Serena Tang, Morgan Stanley’s Chief Global Cross-Asset Strategist.
SFIG holds 385 bonds, none of which exceeds an allocation of 1.23%. Confirming the aforementioned sound credit quality found in the ETF, over 43% of its holdings are rated AA or A. Grades like that imply limited risk of default. That is something to consider at a time when high-yield defaults are trending higher.
Additionally, there’s renewed emphasis by investment-grade borrowers to keep issuance low amid today’s high interest rates. The current interest rate climate isn’t conducive to issuing new debt to fund outlays such as dividends. That restraint implies many investment-grade credits, including SFIG holdings, are tied to issuers that are prioritizing maintenance of current debt obligations, not taking on new ones.
“And as yields have risen, companies have looked at those higher yields and done, I think, a very understandable thing. They are borrowing less money because it’s more expensive to borrow that money. So we’ve seen less supply of corporate bonds into the market. Which means there’s less supply that needs to be absorbed and bought by investors,” concluded Morgan Stanley’s Tang.
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