Home etftrends.com With Corporate Bonds, Quality Is a Difference Maker

With Corporate Bonds, Quality Is a Difference Maker

There are certainly times when it’s appropriate for investors to own high-yield corporate debt and related exchange traded funds. With the widely followed Markit iBoxx USD Liquid High Yield Index down almost 3% over the past month and in the red on a year-to-date basis, this might not be one of those times.

Said another way, investors venturing into the corporate bond arena may be rewarded for focusing on quality investment-graded fare. The Calvert Ultra-Short Investment Grade ETF (CVSB) is an example of an ETF that keeps investors on the right side of the corporate bond spectrum while still generating impressive levels of income.

Additionally, while many market participants approach fixed income investing with long-term perspectives, and rightfully so, CVSB is relevant over the near term because there are mounting signs of deterioration in the junk bond space. Conversely, investment-grade corporate bonds, including CVSB holdings, appear sturdy.

CVSB Allure

Amid increasing corporate bankruptcies and defaults, concern is palpable in the high-yield bond space, but the fundamental outlook is more attractive among investment-grade debt.

“Investment-grade credit fundamentals remain resilient. Overall, issuers have held up reasonably well despite moving past the peak in the strength of balance sheet metrics,” noted Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. “While certain metrics have started to deteriorate, most notably interest coverage as a result of higher interest rates, leverage ratios have stayed well-contained despite the uptick in debt levels.”

Currently, credit spreads are tight, which could compel bond investors to simply embrace lower-risk Treasurys in their hunts for yield. CVSB covers that base because it features significant exposure to U.S. agencies and government bonds. Still, the allure of high-quality corporate debt – more than of CVSB’s portfolio – may be too compelling to ignore.

“However, with very low dollar prices on most investment grade bonds and the macro optimism around a soft landing, we think investment grade credit will remain well placed for some time to come. In-place fundamentals remain strong and thus far are not flashing signs of alarm to argue for long-duration buyers of credit to shift into treasuries, added Tirupattur.

Further cementing the near-term case for CVSB is the point that junk bonds are already the vulnerable segment of the corporate bond space and those risks aren’t yet dissipating. Rather, they’re increasing.

“In high yield, the vulnerable cohort, that is companies with low coverage and low cash debt ratios, reached 5% in size, which is record high post-global financial crisis. In loans, the coverage tail inflected higher for the first time in two years,” concluded Tirupattur.

For more news, information, and analysis, visit the Responsible Investing Channel.

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