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Rising interest rates are making advisors’ jobs harder in 2022. There’s no denying that and the objective of sourcing income for clients is made all the more difficult against that backdrop.
A year-to-date decline of 15.46% by the Bloomberg US Aggregate Bond Index confirms as much. When things are that bad in the bond market, it’s understandable that advisors are frustrated by fixed income and clients are pondering what’s next for this battered asset class.
Still, this year’s bond market carnage is likely to bring opportunity for astute advisors and some of that opportunity may be availing itself today. Take the case of corporate bonds and for the purposes of this article, the focus will be on investment-grade debt in an effort to minimize concerns about credit risk, which are relevant amid a sluggish economy.
Yes, corporate bonds of all stripes are slumping this year, but yields in the space are getting to a point where they may too attractive to ignore.
Size Up Short-Term Opportunities
As advisors know, it’s essential to mitigate rate risk in environments such as the current one, but it’s often difficult to maintain a decent income profile when reducing rate risk. That said, the income proposition currently offered by lower duration investment-grade corporate bonds could well be to clients’ liking.
“The sharp rise in interest rates has significantly benefited short-term investment-grade (IG) corporate bonds, as they now yield over 5% for the first time since the Great Financial Crisis (GFC) — 225 bps above the 20-year average yield,” noted Matthew Bartolini, head of SPDR Americas Research. “Yet the duration of short-term IG corporates has remained relatively flat (currently 1.95 years) given the maturity band focus. This has led to a vastly improved yield-per-unit-of-duration payoff of 2.6 — a higher rate than any other part of the Treasury or IG corporate credit curve. In fact, their yield-per-unit-of-duration of 2.6 registers in the 99th percentile post-GFC.”
The field of short-term investment-grade corporate bond exchange traded funds is extensive, but I’ll mention the SPDR® Portfolio Short Term Corporate Bond ETF (SPSB) here because it’s that issuer’s research being cited.
The $7.05 billion SPSB holds 1,213 bonds with an option adjusted duration of 1.88 years and a 30-day SEC yield of 5.10%. That combination is rarely found in this category.
“And when assessing for credit risk, their spreads are below long-term averages — 86 basis points (bps) versus 110 bps — and in line with post-GFC averages of 82 bps,” adds Bartolini. “This suggests that the extra yield is not from increased credit risks.”
A Good Deal on a Good Deal
Due to the fact that bond yields move inverse of prices, it’s often noted that high yields can be predictive of client outcomes in the fixed space. The higher the starting yield, the shorter the odds are of success, so goes the conventional wisdom.
That implies there’s some value to be had in the bond world today, including with corporate debts. Speaking of value, SPSB sports a low fee – something every client loves.
“SPSB represents a potentially high-quality value opportunity to pick up yield without taking on any additional duration or credit risk relative to other popular IG markets, and relative to their historical average. And with a TER of 4 bps, SPSB is cheaper than 95% of its peers and 50 bps cheaper than the median short-term bond fund,” concluded Bartolini.