Broadly speaking, 2021 was a forgettable year in the bond market and more frustration could be on the way in 2022 as the Federal Reserve ramps up tapering activities and sets out upon interest rate hiking course.
Corporate bonds could be one way for investors to remain engaged with fixed income in the new year while not fretting about Fed tightening. On that note, the WisdomTree U.S. Corporate Bond Fund (CBOE: WFIG) is a relevant consideration.
WFIG, which tracks the WisdomTree U.S. Corporate Bond Index, is slightly outperforming the widely followed Markit iBoxx USD Liquid Investment Grade Index on a year-to-date basis. Credit spreads highlight the allure of WFIG as a 2022 idea.
“Corporate bonds trade at a higher yield–known as a spread–over comparable maturity U.S. Treasuries to provide extra compensation to investors to offset the credit risk of the corporate issuers,” says Morningstar analyst Dave Sekera. “Considering how low-interest rates are, this extra credit spread provides a significant amount of extra yield for investors. For example, with the 10-year U.S. Treasury yielding approximately 1.50%, the yield on the average BBB rated corporate bond is almost double at 2.60%.”
WFIG sports an effective duration of 9.11 years, putting it in the intermediate-term territory. As Sekera notes, that could be the most attractive duration range for investors next year.
“Within the corporate bond market, investors can benefit from one of 2021’s trends,” he adds. “Over the course of this past year, interest rates have risen the most among intermediate maturity bonds. But from here, we expect that medium-term bonds will provide the most yield with less price sensitivity from changes in interest rates as compared with longer-dated bonds.”
Home to a deep bench of 550 bonds, WFIG doesn’t put investors in harm’s way when it comes to credit risk as nearly half its components are rated AAA, AA or A. WFIG’s fundamental screen reduces credit risk while steering investors toward attractively valued income opportunities. That could be an appropriate methodology for investors to consider in 2022.
“With the prospect for a combination of rising interest rates but strong economic growth, we think investors should either remain in or consider moving to, an overweight position in corporate bonds in their fixed-income portfolio allocations,” concludes Sekera.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.