It’s unknown when the Federal Reserve will trim interest rates. It’s also unknown how many times the central bank will do so this year. But there’s optimism among fixed income investors. Many think now could be the time to take on a bit more bond risk. That can take the form of credit or duration risk or both. Those are among the reasons more advisors and investors are perusing corporate bond exchange traded funds.
But the environment still isn’t totally sanguine. That indicates the quality status offered by the WisdomTree U.S. Corporate Bond Fund (WFIG) is attractive today.
WFIG holds nearly 450 bonds, with roughly 48% of those issues rated AAA, AA, or A. Ratings like that imply low downgrade risk and even lower default risk. The latter is highly relevant. That’s because2023 was the worst year for corporate debt defaults since the onset of the coronavirus pandemic.
The Current Corporate Bond Climate
Underscoring the advantages of WFIG in the current corporate bond climate are expectations that default rates could be even worse in 2024 than they were last year.
“Nonfinancial corporate family defaults nearly tripled to 92 in 2023 from 31 in 2022, the highest annual default tally since 2020,” noted Moody’s Investors Service. “Our 12-month trailing issuer-weighted default rate wrapped the year at 5.6%. It is set to peak at 5.8% in early 2024, before slowly reverting to its historic average by June 2024 and then moderating further to around 4% by year-end. Although Q.o.Q. defaults were unchanged at 20 in Q4, levels remain elevated.”
Another reason WFIG could be a compelling option for risk-averse income investors is the fact that some defaulters are repeat offenders. That could be a sign that the risk simply isn’t worth the reward with some junk-rated corporate debt.
“Most re-defaulters were companies which completed at least one round of DEs in the past, followed by another out-of-court restructuring during the last three months of the year,” added Moody’s. “Many were companies which had undergone one or two rounds of DEs previously and ultimately sought Chapter 11 protection or missed debt payments. We expect this trend to persist through most of next year. [That’s because] the default rate is set to remain above average through the first half of the year.”
The research firm observed the worst offenders for defaults were in the media space. But that industry accounts for just 3.48% of WFIG’s portfolio.
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