Corporate Bond Yields Are Low, But Fundamentals Remain Sturdy

For investors looking to investment-grade corporate debt, a good news/bad news dichotomy is currently in play.

The bad news is that yields are low. The good news is that fundamentals are strong, indicating investors mulling exchange traded funds such as the SPDR Portfolio Intermediate Term Corporate Bond ETF (SPIB) don’t need to be overly concerned with defaults and debt downgrades.

The $6.73 billion SPIB, which is over 12 years old, follows the Bloomberg Barclays U.S. Intermediate Corporate Bond Index. That benchmark only includes dollar-denominated bonds with maturities of one to 10 years and at least $300 million of par outstanding. SPIB has a current yield of 3%, according to issuer data, but yields in the broader corporate bond complex aren’t exceptional in the eyes of some market observers.

“The present economic backdrop is supportive for corporate bonds, but such a strong outlook has pulled corporate bond spreads and yields to or near all-time lows,” writes Collin Martin for Charles Schwab. “Even though risks appear relatively low, the low yields are a tough pill to swallow.”

Some Positive Vibes for SPIB

SPIB holds 4,225 bonds with an option-adjusted duration of 4.57 years. As the fund’s name implies, that’s intermediate-term territory, providing some buffer against a sudden spike in long-term interest rates. The average maturity of SPIB holdings is 5.11 years. Adding to the case for the State Street fund is what appears to be benign credit risk.

“The good news: Corporations are generally in great shape to service their debts,” said Schwab’s Martin. “Corporate profits have been growing, financial conditions are seemingly easy, and corporations have, on average, plentiful liquid assets on their balance sheets. When financial conditions are easy, interest rates and borrowing costs are relatively low, and it’s relatively easy for borrowers to secure credit.”

In terms of credit quality, over 46% of SPIB holdings are rated A or Aa on the Moody’s Investors Service scale. The remainder dwell anywhere from one to three notches above junk territory. Another point in favor of SPIB is that, as Schwab’s Martin notes, corporate debt upgrades are outpacing downgrades. That’s been the case in five of the past six months.

SPIB is also applicable for thrifty investors. With an annual fee of 0.07%, or $7 on a $10,000 investment, SPIB is one of the least expensive funds in its category.

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