Recent economic data points have been mixed. On the more positive side of the ledger, there’s evidence that inflation is cooling and consumer spending remains sturdy. Conversely, the jobs market is cooling. The unemployment rate ticked higher in July and there’s speculation that significant downward revisions of prior months’ jobs data is in the offing. Operating on the assumption that economy is slowing, some investors may be skittish about corporate bond investing. This could hold even for bonds with investment-grade ratings.
However, the longer-ranging outlook for high-quality corporate debt is appealing and that could be a sign of opportunity with exchange traded funds such as the WisdomTree U.S. Short Term Corporate Bond Fund (QSIG).
QSIG, which turned eight years old in April, has an effective duration of 2.51 years, implying the fund isn’t highly sensitive to changes in interest rates. Even with the Federal Reserve nearing a rate cut in September, the case for QSIG is not diminished. Arguably, the current state of the investment-grade corporate bond market bodes well for the ETF despite its low duration.
QSIG Could Be at Right Place at Right Time
Over the past several years, there have been indications of corporate decision makers being less than fully confident about the macroeconomic, but those reservations have benefits in terms of supporting balance sheet strength. In turn, that supports the case for ETFs such as QSIG.
“The lack of corporate confidence since COVID means that corporate balance sheets are generally in a better place if the economy potentially slows, “ noted Morgan Stanley’s Andrew Sheets. “But while this is helpful overall, it’s important to note that it doesn’t apply in all cases. We still see plenty of dispersion between winners and losers, driving divergence under the hood of the credit market. Even if balance sheets are stronger overall, there is plenty of opportunity to pick your spots.”
Some may view companies’ tight-fistedness on some fronts, including mergers and acquisitions, negatively. However, it’s also a sign of prioritizing debt service and reduction and keeping some cash on hand. These moves can benefit corporate debt and ETFs like QSIG.
Additionally, while interest rates are currently high, many issuers capitalized on low rates prior to 2022 to refinance debt at more favorable rates. That’s paying off today.
“While companies across the ratings spectrum generally didn’t increase their leverage over the last several years, they did take advantage of refinancing the debt they already had at historically low rates. And this is important for thinking about the stress that higher interest rates could eventually produce,” added Sheets.
That could be another point in favor of corporate bond ETFs, including QSIG.
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