Uncertainty Gives Way to Opportunity for Corporate Bonds

An incoming presidential administration in 2025 will add a level of uncertainty, but that the unknown could also give way to opportunity. This is especially the case with corporate bonds.

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According to a Reuters report, investors are anticipating volatility for corporate bonds in the new year. As mentioned in the report, strategists and investors are expecting corporate bond spreads to fluctuate “as the new Trump administration implements a reform agenda that could be inflationary and slow the pace of U.S. interest rate cuts.”

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Nonetheless, bond market pundits also see robust demand for corporate bonds, especially in the beginning of the year. The start of 2024 saw record bond issuance by corporations, and history could repeat itself in 2025.

“The good news is that unlike in awful 2022, the starting yield level for the asset class is high. Even if both Treasury yields rise further and credit spreads widen, you’re still likely to have at worst a flattish total return on a forward-looking 12-month basis,” said Andrzej Skiba, head of BlueBay U.S. fixed income at RBC Global Asset Management.

While it’s a guessing game to determine what the Fed will do with interest rates in 2025, investors can still prepare with the flexibility of corporate bond ETFs in varying maturities. Fixed income investors can opt to use a bond laddering strategy to stagger ETFs. That said, Vanguard has short-term, intermediate, and long-term options. Using ETFs as opposed to building an individual bond portfolio can help lower fees and add more diversification.

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With rate risk still a concern in 2025,  short-term bond funds can remain an option. For corporate bond exposure, consider the 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.

Intermediate and Long-Term Options

Investors who want a median solution to corporate bond exposure can opt for intermediate bonds. They can strike the balance between yield and rate risk mitigation. For this level of exposure, Vanguard has the Vanguard Interim-Term Corporate Bond ETF (VCIT). This fund 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.

For those emboldened to take on more rate risk to maximize yield, an option is long-term corporate debt, or, specifically, the Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT). The fund 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.

For more news, information, and analysis, visit the Fixed Income Channel.