As the capital markets brace for potential rate cuts before the end of the new year, investor demand is building for corporate bonds, leading businesses to issue more debt from investment-grade to high yield.
As a Financial Times report indicated, it’s been a busy time for corporate bond issuance, which was already a trend to start 2024. However, with stubborn inflation putting rate cuts on the back burner, businesses may have been thinking twice before issuing new debt.
However, the current macroeconomic environment could be tipping back in favor of rate cuts to happen before 2024 turns into 2025. The U.S. Federal Reserve decided to keep rates unchanged again, while slower job growth during April could potentially mean a cooling economy.
Meanwhile, businesses have been taking advantage of investor demand for corporate bonds. In particular, investment-grade debt saw record issuance as the FT report noted, selling “$56.7bn of new bonds across 45 issuances — the largest weekly dollar amount raised since late February and the greatest deal count in two-and-a-half years”
Furthermore, one of the attractive features of corporate bonds is their yield relative to safer haven government debt. With the expectation that interest rates will fall, investors are more inclined to lock in the higher rates now before they drop.
“It’s clearly been an exceptionally busy week in the investment grade bond market, particularly the first three trading sessions of this week,” said Dan Mead, head of the investment-grade syndicate at BofA Securities. “I think what we have seen is perhaps a bit of capitulation from issuers that rates are going to stay higher for longer and less of an expectation that we’re likely to see a material move lower in rates anytime soon.”
Investment-Grade Corporate Bonds in One ETF
As more issuance takes place, investors can look to get broad exposure through the Vanguard Total Corporate Bond ETF Shares (VTC). It seeks to track the performance of the Bloomberg U.S. Corporate Bond Index, which measures the investment-grade, fixed-rate, taxable corporate bond market.
VTC uses a fund-of-funds structure that includes the following three funds:
- Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH). The fund seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. It employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index.
- Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT). The fund also features a low 0.04% expense ratio and tracks the performance of the Bloomberg 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.
- Vanguard Interim-Term Corporate Bond ETF (VCIT). It tracks the Bloomberg U.S. 5-10 Year Corporate Bond Index. That index includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies. It has maturities of between five and 10 years.