Investment-grade corporate bonds, a longtime source of funding for the corporate world, have become an increasingly attractive Investment opportunity as the global economy continues to recover from the pandemic. With yields on U.S. Treasuries and riskier debt securities such as high yield bonds on the rise, many investors are turning to Investment-grade corporate bonds as a safer option. The move by top-rated companies into the Investment-grade bond market is expected to continue, regardless of economic conditions or what the Federal Reserve does with interest rates.
Inflation readings released Tuesday gave the Fed more room to slow the pace of hikes, which could be beneficial for Investment-grade bond yields. According to a recent survey conducted by the Federal Reserve Bank of New York, the majority of respondents believe U.S. corporate bond spreads will remain low or remain unchanged if the Fed slows its rate hikes, as long as Inflation remains below 2%.
For now, investors should consider reducing U.S. large-cap index exposure and instead look to Treasuries, munis and Investment-grade corporate bonds for income and capital preservation. But with bond markets recovering in recent weeks and the yen strengthening against the dollar, there is an opportunity for investors to capitalize on Investment-grade corporate bonds.
The risk-reward combination for the corporate bonds represents an attractive Investment opportunity. From the recent data, it is possible to calculate the current yield on Investment-grade corporate bonds, which is around 3.2%. This gives investors a better return than the yield on U.S. Treasury bonds, which is around 1.8%.
It is also important to take into account the credit quality of the issuer when investing in corporate bonds. High-rated companies with strong balance sheets are more likely to weather economic downturns and remain a reliable source of income for investors. The iShares iBoxx $ Investment Grade Corporate Bond ETF (AMEX:LQD) offers exposure to a diversified portfolio of Investment-grade corporate bonds with an average credit rating of BBB- or higher.
With a high probability of a recession in 2023 (The Conference Board estimated a 96% chance), Investment-grade bonds will be much safer to weather the economic turbulence than stocks. Some market observers believe Investment-grade corporate bonds are among the fixed income assets that could bounce back next year, even in the face of a global economic downturn.
Thus, investors looking for a relatively safe way to generate income and preserve capital should consider adding Investment-grade corporate bonds to their portfolios. With yields on Investment-grade corporate bonds currently at 3.2%, investors have the potential to earn a higher return than the yield on U.S. Treasury bonds, while also benefitting from the relative safety of the asset class.
