Corporate bonds

Diversify corporate bond risk with this ETF

With downward pressure on bond prices, even the safest bets like benchmark Treasuries and longer-dated bonds were likely to boost yields. Sure, riskier debt like corporate bonds has seen its prices fall, but that risk can be diversified by looking in the right places.

Nevertheless, risks remain for corporate bonds. With recessionary pressures seeping into investor sentiment, the same fears sparked by the pandemic are resurfacing in riskier bonds like corporate debt issues – the fear that credit defaults could arise if the Federal Reserve US continues to tighten rates en route to a recession.

“A new gauge from the Federal Reserve shows moderate but growing signs of distress in high-quality corporate bond trading, reflecting investors’ nervousness over a slowing economy,” said a Wall Street Journal report said.

“The alert comes from a new measure called the Corporate Bond Market Distress Index, or CMDI, which the New York branch of the Fed plans to update once a month,” the report adds. “The first snapshot, offered on Wednesday, shows greater pressure in the approximately $5 trillion market of investment-grade U.S. corporate bonds, compared to historic lows in recent backcast data released at the end of the month. ‘last year.”

Of course, one market snapshot may vary with the next. Some market experts were surprised to see high-quality corporate bonds showing signs of distress.

“From our headquarters, we don’t feel the investment grade market is showing much distress or liquidity issues, at least not to the magnitude that this highlights,” said Anders Persson, Director of Nuveen Global Fixed Income.

An active way to diversify corporate bonds

It is difficult to invest in the bond market without also thinking about yield. With a 30-day SEC yield of 4% to May 31, the American Century Diversified Corporate Bond ETF (KORP) provides yield while adding diversification into primarily investment-grade holdings.

The fund seeks current income with an emphasis on higher quality debt while aggressively allocating a portion of the portfolio to high yield. By its product websiteKORP creates a systematically managed portfolio that incorporates fundamental and quantitative expertise that:

  • Adjusts investment grade and high yield components to balance interest rate and credit risk
  • Screens individual credits to look for those with strong fundamentals, reduced risk of default, attractive valuations and liquidity
  • Adjusts sector and duration exposures as risks and opportunities emerge

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