As stocks fall and interest rates rise, investors are getting more excited about corporate bonds than they have in a generation. A side effect of the Federal Reserve’s tightening policy is that it has driven up interest rates everywhere, including in the corporate bond market. But as the pros point out, investors need to be cautious and consider factors like credit risk and rate sensitivity because a recession could be looming. For this reason, bond investors are directed to the shorter-duration bonds, those in the 2-and-under sector, which have the highest yields in years but less risk than longer-dated bonds. They also favor higher quality bonds over low quality high yield or junk bonds. “If you look at investment grade yields at around 5.4%, that’s a level of return that investors haven’t seen since 2009, and obviously that was a very different spread environment than we were in. we are currently finding,” said Jonathan Duensing, head of US rates at Amundi Asset Management. Bond prices fall as yields rise, so investors buying now could see their bonds fall if rates continue to rise. But Duensing said the high yields now act as a cushion against that for investors in shorter-duration bonds. “The yields are high. If you’re talking about a two- to three-year investment horizon, the vast majority of these good-quality stocks will mature,” he said. “If you invest in something with a 5% yield with 2 years to maturity, you will be able to get that 5% yield. There will be some volatility in there, but the fact is that the yield can protect you from some short-term volatility.” Stick to quality Investors can make their own purchases of individual corporate bonds in $1,000 increments, but strategists warn that in this uncertain time when there could be a recession, it’s best to stay in bonds of the highest quality. “What’s happening at the short end of the yield curve, there’s no doubt that it has good value, and I think it will be a good investment,” said Gilbert Garcia, managing partner at Garcia Hamilton Associates. . “Any widening in corporate spreads will likely be offset by lower Treasury yields, but I’ll stick to high-quality names.” Garcia said he likes names like IBM and Apple. IBM’s 2-year bond yielded 4.71%, according to Tradeweb. It has been rated A- by Standard and Poor’s and A3 by Moody’s. Apple’s 2-year bond, rated Aaa by Moody’s and AA+ by S&P, yielded 4.29%, according to Tradeweb. Garcia said he avoids finances. “Financials themselves, banks and brokers are widening. The corporate bond spread will probably widen, but when you’re this short, the break-even point gives you a lot of headroom before you lose money. money,” Garcia said. Garcia said he also likes Aflac, Walt Disney, Deere and Caterpillar. According to Tradeweb, a 5-year-old Aflac fetched 4.88%, while a 2-year-old Deere was at 4.42% and a 2-year-old Caterpillar at 4.46%. Anthony Watson, founder of Thrive Retirement Specialists, said he advises clients of his Dearborn, Michigan firm to hold corporate bonds as one of nine asset classes. “We think it makes sense to own this asset class. The way we choose to access corporate bonds is through a low-cost, highly diversified index fund and part of the reason for that is that when it comes to corporate bonds, there are more difficulties with them than with government bonds,” he said. Treasuries are impacted by the length of the maturity , while corporate bonds carry credit risk and can be impacted by a credit downgrade eg Playing with Funds One fund that tracks corporates in the short term is the SPSB, SPDR Portfolio Short Term Corporate Bond ETF. Other short-term funds have seen declines, but they have outperformed the more than 19% decline in the S&P 500 this year.The SPSB ETF tracks the Bloomberg 1-3 Year Corporate Bond Index, and it is down 5.4% YTD Short-term funds also outperformed pop ular iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, which holds longer duration bonds and has lost 22.3% so far this year. The weighted average maturity is 13.22 years, according to BlackRock. There’s also the Vanguard Short-Term Corporate Bond ETF VCSH, which tracks a corporate bond index, is down 8.5% this year. The iShares 1-5 Year Investment Grade Corporate Bond ETF IGSB ETF is also much the same. It tracks the ICE BofA 1-5 Year US Corporate Index. There’s PIMCO Enhanced Short-Maturity Active ETF MINT, down 2.5% for the year. About half of the ETF is made up of investment-grade credits. It also holds securitized assets and other short-term instruments. Watson said he favors an ETF approach with multiple holdings because credit risk could be an issue. He said the Fed’s hawkish stance has the market worried that the central bank could lead the economy into recession. “It now means investors need to be rewarded more for taking on that credit risk. If we go into a recession, some companies are going to struggle,” he said. He added that the movement in rates has changed the perception of bond investments which have had poor returns for years. “I think there’s opportunity in the space for a while. You’ve got two different things going on. You’ve got an economy that’s not screwed up, that’s slowing down, and maybe heading towards the recession,” he said. “That will heavily depend on the interest rate outlook for the Fed.”
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