Corporate Bonds Could Be 2023 Fixed Income Stars

To be specific, investment-grade corporate bonds could shine this year in the fixed income arena, potentially lifting dozens of related exchange traded funds in the process.

Among that group, the VanEck Moody’s Analytics IG Corporate Bond ETF (MIG) might merit consideration due to a compelling methodology. MIG, which follows the MVIS^® Moody’s Analytics^® US Investment Grade Corporate Bond Index, delivers exposure to attractively valued investment-grade corporate debt with reduced default risk.

That’s something to consider following a spike in corporate bankruptcies in December. While that’s a potentially ominous statistic for some corners of the high-yield bond market, which MIG isn’t exposed to, some market observers argue there are indications of a return to normalcy in the broader bond market following a bumpy 2022.

“In the 4th quarter, a sense of normalcy started to return. The annual inflation rate was dropping and there was a sense that we had a good idea of what the Fed was going to do – 1) raise rates a couple more times to be safe, 2) end the rate hiking cycle around the end of Q1 with a terminal Fed Funds rate of around 5% and 3) potentially start rate cuts around the end of 2023 based on the state of the economy and inflation at that time,” wrote Michael Gayed in the latest edition of the “Lead-Lag Report.”

Noting that credit quality and duration are the two primary functions of interest rate risk, Gayed points out that credit spreads – the yield differential between corporate bonds and Treasuries of comparable quality and duration – haven’t moved much in recent months in the investment-grade corporate space. That could signal opportunity for those bonds and ETFs such as MIG as 2023 unfolds.

Indeed, MIG answers the quality call as 88% of its holdings are rated investment-graded, including roughly 28% graded AA or A.  Importantly, due to MIG’s attempts to identify attractively valued debt, investors don’t have to pay up for the privilege of quality.

“High yield credit spreads increased from around 300 basis points at the start of 2022, when the Fed started to really kick start its rate hiking program into a higher gear, to 470 basis points today. Investment-grade credit spreads on the other hand have barely budged,” concludes Gayed.

With a 30-day SEC yield of 5.50%, MIG sports an effective duration of 6.47 years, according to issuer data.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.