ETFs

Investor Confidence in Recovery Spurs Move into Corporate Bonds

Investors are growing more confident in the post-pandemic recovery, which is spurring movement into corporate bonds, a good sign for the Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT).

"The premium between corporate debt and US Treasuries has dropped to its lowest level in more than a decade in a sign that investors are growing confident recent rises in inflation will not hinder the economic recovery," a Financial Times article said. "The collapse in the difference between investment yields — known as the spread — means buyers are demanding a much lower premium than previously for owning corporate debt, which is more risky than super-safe US Treasuries."

As per the fund description, VCLT seeks to track the performance of a market-weighted corporate bond index with a long-term dollar-weighted average maturity. The fund carries a low 0.05% expense ratio.

Furthermore, the fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 10+ Year Corporate Bond Index. This index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities greater than 10 years. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.

VCLT Chart

Tightening Credit Spreads

Tightening credit spreads haven't dissuaded investors from heading into corporate bonds. In essence, higher-yielding assets are still in favor as the prospect of rising rates continues.

"The spreads between US Treasury and corporate bond yields have tightened markedly this year, as investors gained confidence and clamored to own even marginally higher yielding assets in a low return world," the FT article said further. "That spread compression, which indicates the level of risk investors see in lending to companies compared to the US government, had come under pressure from the spectre of higher inflation from mid-April to May."

The article also noted that an increasing number of investors are siding with the Fed's notion that inflation is on the horizon, but that it is transitory in nature.

"The Fed has been controlling the transitory narrative which has provided confidence to corporate bond investors,” said Adrian Miller, chief market strategist at Concise Capital Management. “After all, corporate bond investors are more focused on the expected strong growth path.”

For more news, information, and strategy, visit the Fixed Income Channel.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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