With Income Back, Consider Corporate Bonds With MBBB

There’s much work to be done for corporate bonds when it comes to fully erasing last year’s declines, but with a January gain of 3.33%, the Bloomberg US Aggregate Bond Index certainly started 2023 on a strong note.

It will take time for a broader bond market resurgence to materialize, but some experts are already saying that the “income” is back in “fixed income,” and this could be a sign that investment-grade corporate bonds are ready to pen their redemption stories. Investors can get in on that act with exchange traded funds such as the VanEck Moody’s Analytics BBB Corporate Bond ETF (MBBB).

MBBB holds 175 bonds and makes good on the promise of income, as highlighted by a 30-day SEC yield of 5.31%. On a historical basis, that’s high for most ETFs focusing on investment-grade corporate bonds. That lofty yield could also be a sign that MBBB could generate capital appreciation for investors this year.

“Income is finally back in fixed income thanks to higher yields and coupons. Short[1]term government bonds and investment grade (IG) credit now offer some of the highest yields in the last two decades,” according to BlackRock research.

As experienced fixed income investors know, the higher up the yield spectrum they go, they’re also likely moving further down the credit quality chain. That underscores the advantages offered by MBBB because quality, in the eyes of some market observers, is likely to be in style when it comes to corporate bonds this year.

“We prefer to earn income right now from these high-quality fixed income assets as rates rise and stay high. Fixed income’s appeal remains intact the longer central banks keep rates near their peak. The lack of duration – or the sensitivity of bond prices to interest rates – in short-term paper also helps preserve income even if yields rise anew,” added BlackRock.

Considering that MBBB yields north of 5% and 83.49% of its holdings are rated investment-grade, the ETF’s effective duration of 6.58 years, though not short-term by any stretch, is tolerable. It could also be rewarding for investors if the Federal Reserve eventually backs away from interest rate increases, as many bond traders believe will happen later this year. Additionally, MBBB could provide investors with some recession protection.

“The case for investment-grade credit has brightened, in our view. We think it can hold up in a recession, with companies having fortified their balance sheets by refinancing debt at lower yields,” concluded BlackRock.

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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.