Recent market volatility has created an attractive entry point for income investors into investment-grade corporate bonds with attractive yields, according to Wells Fargo Investment Research. Yields on broad investment-grade benchmarks are currently hovering around 5%, significantly higher than they have been for much of the past decade, said Luis Alvarado, co-head of the firm’s global fixed income strategy. He pointed out that these are mainly caused by Treasury interest rates and not due to deterioration in corporate fundamentals. He said credit spreads remained relatively subdued. “From our perspective, this is an interesting combination for investors: historically attractive returns, a generally solid balance sheet and manageable credit risk, especially compared to the riskier parts of the bond market,” Alvarado told CNBC. For example, the iShares Broad USD Investment Grade Corporate Bond ETF (USIG) currently has a 30-day SEC yield of 5.11%. The expense ratio is 0.04%. USIG YTD Mountain iShares Broad USD Investment Grade Corporate Bond ETF YTD Investment Grade Corporate Bonds are rated AAA to BBB- by Standard & Poor’s and Aaa to Baa3 by Moody’s. Companies are poised to ‘ride this out’ Both bonds and stocks have been rocked by volatility since the Iran war began on February 28th. Although bond yields rose on concerns about soaring energy prices and persistently high inflation, most investment-grade companies entered the period with low short-term refinancing needs, debt locked in at lower interest rates, and higher interest coverage ratios, he said. “This is why spreads have widened only modestly even as yields have risen,” he added. “In our view, IG companies are better positioned to ‘ride this out’ than either equities or low-quality credit, where margins and refinancing risks are much more sensitive to inflation shocks.” Meanwhile, Alvarado said he is closely monitoring private credit for contagion risks, but investment-grade debt exposure appears to be limited. Still, he doesn’t expect volatility to abate anytime soon, meaning investors will see yields straighten out soon. That doesn’t mean you shouldn’t expect it to go down, which is good for income investors, Alvarado added, because if rates eventually go down, you can get more money up front and prices could go up. “This opportunity will not disappear overnight, but patience and a long-term view will be important,” he added, adding that investors should buy multiple stocks with different maturities and reinvest the proceeds from maturing bonds. Alvarado believes security choices are important, saying, “Investors will still need cell phones and will continue to pay their internet providers.” Alvarado also likes financial institutions, especially large banks and insurance companies, because they are generally well-capitalized and can benefit from higher interest rates. He also said it has a relatively attractive spread. Finally, Alvarado noted that select utility and infrastructure issuers could also be attractive. He said he is also looking at companies with regulatory frameworks that support predictable cash flows and ancillary businesses that benefit from hyperscaler capital investments. Artificial intelligence related themes.
