Oith the end of bond purchases by the Federal Reserve, the big Wall Street banks are salivating at the idea of buying corporate bonds.
With inflation soaring, the Fed is also looking to raise interest rates this year as the economy continues to recover from the pandemic. Before that happens, banks are looking to add corporate bonds to their portfolios before rising rates drive up borrowing costs.
“Wall Street’s biggest banks are expected to hit the corporate bond market after reporting their quarterly results in a bid to raise funds before the Federal Reserve drives up borrowing costs,” Bloomberg reports. “JP Morgan Chase & Co. credit research analysts Kabir Caprihan and Nikita Dyatlov expect big banks to borrow between $24 billion and $32 billion following their earnings reports. Citigroup Inc. , Wells Fargo & Co. and JP Morgan itself all reported results this past week.”
“That said, we believe the bias is to the upside and we won’t be surprised if we see closer to $35 billion to $38 billion,” JPMorgan analysts said in a note.
A short-term corporate bond to consider
As rates rise, this could erode bond income as investors lose yield. That said, a short duration can help mitigate interest rate risk with exchange-traded funds (ETFs) like the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH).
“Investors are turning to shorter-term bonds as they grow increasingly concerned about rising yields, which may hit longer-term bonds the hardest,” the Bloomberg report added.
“We like short-term credit as a natural hedge against inflation, rising rates and potential deterioration in credit fundamentals,” said Hunter Hayes, senior vice president and portfolio manager of Intrepid Income Fund at Intrepid. CapitalManagement. The report also notes that Hayes foresees opportunities in higher-quality securities as well as high-yield bonds when the bonds mature over the next two years.
VCSH seeks to track the performance of a market-weighted corporate bond index with a dollar-weighted average short-term maturity. The fund uses an index investing approach designed to track the performance of the Bloomberg US 1-5 Year Corporate Bond Index.
This index includes taxable U.S. dollar-denominated, investment-grade, fixed-rate securities issued by industrial, utilities and financial companies, with maturities between one and five years. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.