Corporate bonds delivered solid gains last year. And market observers expect more of the same in 2024. But it’s important to note that the consensus is leaning toward investment-grade over junk-rated corporate issues. From that, it can be inferred that exchange traded funds such as the VanEck Moody’s Analytics BBB Corporate Bond ETF (MBBB) could be worth considering in 2024. MBBB, which celebrated its third birthday last month, returned nearly 10% in 2023.
The ETF’s point of emphasis is investment-grade corporate with ratings at the lower end of that spectrum. That could provide a platform for more upside than the highest-rated corporate bonds. Adding to the allure of MBBB is that its underlying index attempts to identify attractively valued bonds. It also identifies issues that are at low risk of being tagged with the junk label.
MBBB Could Be Marvelous This Year
MBBB closed 2023 with a 30-day SEC yield of 5.31%. This is reflective of the Federal Reserve’s 11 interest rate hikes since the start of 2022. There is some good news. Some experts believe today’s elevated interest rates will entice more investors to embrace the high yields found across the high-grade corporate bond arena.
“What is not a possibility but rather a certainty, in our view, is that yields at multi-decade highs leads to buying of HG credit day in and day out,” according to a recent report by JPMorgan.
The bank believes the buying of corporate bonds this year will be broad-based as institutional and income-hungry retail investors enter the market. That could be a catalyst for MBBB. Additionally, the U.S. economy’s sluggish though still positive growth rate could bring more investors into high-quality corporate debt. That includes MBBB holdings.
“Such an environment of slow but positive growth, declining rates such that total returns for HG bondholders will be strong. And lower policy rates which makes cash less attractive are all quite supportive for HG credit markets,” added JPMorgan.
Additionally, credit metrics are sturdy across the investment-grade corporate debt space. This indicates that MBBB can live up to its mission of delivering exposure to bonds with reduced probabilities of being downgraded to junk territory.
“Strong credit metrics due in part to prudent balance sheet management also support the picture for high-grade bonds next year, according to JPMorgan, which sees only a small proportion of high-grade issuers being downgraded to junk status,” reported Reuters.
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