Like stocks, bonds can be subject to seasonal trends. One such trend is that, historically speaking, September often brings a spate of fresh corporate debt issuance. Owing to the highest Treasury yields in two decades, that historical trend isn’t repeating this year. That makes sense because corporate borrowers don’t want to incur elevated financing costs. The combination of tighter supply and elevated yields on existing corporate debt could stoke interest in bond ETFs such as the Calvert Ultra-Short Investment Grade ETF (CVSB).
The actively managed CVSB allocates more than 56% of its roster to investment-grade corporate debt and the rest of its portfolio to U.S. Treasuries and agency debt, ensuring a strong credit profile that could be appealing even to risk-averse fixed income investors.
Right Environment for CVSB
CVSB debuted in January, and while the fund is still in its infancy, age isn’t important. Relevance and utility are, and it appears the stars could be aligning over the near term for the new ETF.
“Not only are investment grade bond yields at some of their highest non crisis levels in the last 20 years, they’re unusually high relative to the earnings or dividend yield offered on company stock,” observed Andrew Sheets, global head of Corporate Credit Research for Morgan Stanley.
“Now, if a company views their equities attractive relative to debt, one way they can express this is to borrow more while buying back or retiring those shares in the market,” he added. “But conversely, if companies start to view borrowing as expensive, relative to their shares, borrowing and buybacks should both slow. And year-to-date that’s exactly what we’ve seen from non-financial investment grade companies.”
As noted above, rising interest rates have forced bond yields, including corporates higher, meaning issuers have to pay more to entice investors. That’s contributing to dwindling supply. However, investors don’t need to worry about that scenario with an ETF such as CVSB.
Plus, market participants needn’t worry about diminished income when tapping CVSB. The Calvert ETF sports a 30-day SEC yield of 5.87%. This is well in excess of the yields found on short-term bond benchmarks as well as aggregate bond indexes. Add to that, if the Federal Reserve is in fact done tightening, CVSB could offer upside potential as yields decline.
“We think this could modestly discourage borrowing by investment grade companies as they wait for more favorable rates and encourage buying as investors hope to now lock in these higher yields. Moreover, we think that this pause by central banks could help reduce overall bond market volatility, working to the relative advantage of assets that pay investors to hold them like corporate credit does,” concluded Sheets.
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