When it comes to surging bond yields, Treasuries aren’t the only game in town. That ominous scenario, which means bond prices are declining, is permeating the fixed income space, including corporate debt and the related ETFs.
However, now may be an ideal time for advisors and fixed income investors to consider high-quality corporate bond ETFs such as the (SCHJ ) and the (SCHI ). SCHI and SCHJ may be worth examining today, not only because yields are high, but spreads are low.
Corporate bond spreads articulate the differences between yields on those bonds and Treasuries, highlighting the added compensation investors command for taking on more risk.
“Credit spreads (the yield above a comparable Treasury) are low—meaning investors aren’t compensated very well for taking additional credit risk,” noted Collin Martin of Schwab. “Any further increases in Treasury yields could pull their yields even higher, with prices potentially falling even more. Still, today’s high starting yields and generally strong corporate fundamentals may provide reasons to remain invested and to take a little credit risk in moderation.”
As its name implies, the aforementioned SCHI is an intermediate-term corporate bond ETF and that may be the most appealing part of the duration spectrum to be engaged with today due to some unusual though potentially favorable circumstances.
“The average yield to worst of the Bloomberg U.S. Intermediate Corporate Bond Index is near 5.75%, close to the high end of its range over the past 15 years. Yield to worst is the lowest possible yield an investor can receive from a callable bond, barring default,” added Martin.
The $10.9 billion SCHI, which turned seven years old earlier this month, holds nearly 2,400 bonds with an average effective duration of six years. The ETF sports a 30-day SEC yield of 6.01%, and that’s potentially appealing to advisors and investors because higher starting yields imply shorter odds of long-term success for fixed income investors.
“The recent rise in bond yields has weighed on prices, since bond prices and yields move in opposite directions,” according to Martin. “Importantly, while many total returns have been negative, excess returns for investment-grade and high-yield corporate bonds have been positive.”
As for low spreads, that may be a sign that investors are confident in the strength of the economy and that they’re not overly concerned with high Treasury yields denting high-grade corporate bond fundamentals. Those could be positive signals for SCHI.
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