It’s been a bad year for bonds, with 2022 being the worst time for the asset class in nearly a century. But of course, not all fixed income funds are the same, and abandoning this asset class altogether may not be the best decision for long-term investors. After all, not only are bond funds currently at great prices, but they are also very likely to rebound.
Morgan Stanley’s Global Investment Committee sees an opportunity in short-term investment-grade US corporate bonds for several reasons. For one thing, at around 5.6%, nominal yields are the highest they’ve been in a decade. Another reason is that short-term bonds may be less sensitive to higher rates, especially if the Federal Reserve continues to raise rates beyond market expectations.
Additionally, on average, credit quality is strong and overall gross leverage is reasonable at 2.3. Finally, many issuers of investment grade debt securities have already locked in low rates, with further refinancing activity expected to be modest over the next 18 months.
“In this environment, we reiterate the potentially higher risk/reward profile offered by shorter duration, higher quality bonds,” wrote Lisa Shalett, chief investment officer, Wealth Management, at Morgan Stanley. “Investors should consider locking in strong near-term returns as we await the stock market roller coaster.”
So, for investors who are either looking to get back into the market, have additional cash to invest, are planning to get back into the market, or have excess cash to deploy, short-term corporate bond ETFs duration and of superior quality as the Vanguard Short Term Corporate Bond ETF (VCSH) can be a good starting point.
VCSH seeks to track the performance of a market-weighted corporate bond index with a dollar-weighted average short-term maturity. The fund uses an index investing approach designed to track the performance of the Bloomberg US 1-5 Year Corporate Bond Index.
This index includes taxable US dollar-denominated, investment-grade, fixed-rate securities issued by industrial, utilities and financial companies, with maturities between one and five years. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.
For more news, information and analysis, visit the Fixed income channel.
