Generally speaking, 2021 has been an unforgettable year in the bond market and more frustration could occur in 2022 as the Federal Reserve intensifies its tapering activities and embarks on interest rate hikes.
Corporate bonds could be a way for investors to stay committed to fixed income in the new year without worrying about Fed tightening. On that note, the WisdomTree U.S. Corporate Bond Fund (CBOE: WFIG) is a relevant consideration.
WFIG, which tracks the WisdomTree US Corporate Bond Index, slightly outperforms the Markit iBoxx USD Liquid Investment Grade Index which has been widely followed since the start of the year. Credit spreads highlight the appeal of WFIG as an idea for 2022.
“Corporate bonds trade at a higher yield, known as spread– on US Treasury bills of comparable maturity to provide additional compensation to investors to offset the credit risk of private issuers,” says Morningstar analyst Dave Sekera. “Given low interest rates, this additional credit spread provides significant additional yield for investors. For example, with a 10-year US Treasury yielding around 1.50%, the average yield a BBB-rated corporate bond is nearly double that at 2.60%.
WFIG sports an effective duration of 9.11 years, which puts it in the medium term territory. As Sekera notes, this could be the most attractive duration range for investors next year.
“In the corporate bond market, investors can benefit from one of the trends of 2021,” he adds. “Over the past year, interest rates have risen the most among mid-term bonds. But from there, we expect mid-term bonds to offer the best yield with less price sensitivity to changes in interest rates compared to longer-term bonds.
Home to a wide array of 550 bonds, WFIG does not put investors at risk of credit risk as nearly half of its constituents are rated AAA, AA or A. WFIG’s fundamental screen reduces credit risk while directing investors to attractively valued income opportunities. This could be an appropriate methodology for investors to consider in 2022.
“With the prospect of a combination of rising interest rates and strong economic growth, we believe investors should either hold onto or consider moving to an overweight position in corporate bonds in their income portfolio allocations. fixed,” concludes Sekera.
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Opinions and predictions expressed herein are solely those of Tom Lydon and may not materialize. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.