Investment Grade Bonds: A 2023 Forecast

Investment grade bonds have been gaining traction in recent months, with a total of $19 billion pouring into funds which buy corporate debt around the world since the start of 2023. This comes after a dismal 2022 for fixed income funds, with bonds offering better yields relative to 2021. Despite this, the hypothetical high yield dividend portfolio experienced a -15% total return in 2022.

However, instead of investing in all Investment-grade muni bonds, investors are taking a 'high' yield approach and investing in some holdings below the Investment grade level. This has been seen in ETFs such as BLV, which covers the Investment grade spectrum of bonds and offers higher yields. For example, Farmers & Merchants Investment Inc. boosted its holdings in shares of iShares 0-5 Year Investment Grade Corporate Bond ETF by 1.6% in the 3rd quarter of 2022.

Last year's sell-off in the Investment-grade corporate bond market was one of the largest in history, as the most creditworthy U.S. companies borrowed money. This has had an effect on the 2023 forecast of the bond market, with some investors looking for Investment-grade bond exposure as a way to tackle inflation and recession simultaneously.

Barron's turned to a number of analysts to get an idea of the 2023 forecast and what it could mean for investors. It was found that, in light of the current economic conditions, it is recommended to invest in both Investment-grade and high-yield bonds. This is because, despite offering higher yields, Investment-grade bonds are still considered safer Investment than high-yield bonds, and therefore may be more attractive to investors.

In terms of the outlook for 2023, the consensus appears to be that the Investment grade bond market will continue to be volatile. However, this is not necessarily a bad thing, as the volatility could provide investors with opportunities to buy and sell at advantageous times. It is also likely that the yields on Investment-grade bonds will remain attractive, as the Federal Reserve is expected to keep interest rates low throughout the year.

Overall, the outlook for the Investment grade bond market in 2023 is uncertain, but there are still opportunities for investors to capitalize on. By investing in both Investment-grade and high-yield bonds, investors can diversify their portfolios and protect themselves against potential losses.