VCLT - VCLT: Corporate Bond Investors Need To Look At This Chart

2024-03-27 12:43:24 ET

Summary

• Now is a bad time to buy corporate bonds, especially long-term bonds like those in the Vanguard Long-Term Corporate Bond Index Fund ETF Shares.
• The yield spread between BAA corporate bonds and Treasury Rates is near its lowest levels in 30 years, indicating high risk-premium of corporate bonds.
• Additionally, the VCLT ETF is also exposed to credit risk and certain tax headwinds compared to its Treasury counterparts.

Investment thesis

I will get to my point right away. My thesis is that now is a really bad time to buy corporate bonds, especially long-term bonds like those in the Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT). In the remainder of this article, I will detail my argument. But the gist is all summarized in the following chart – a chart I urge all corporate bond investors to look at. As a bond investor myself, a key parameter I monitor closely is the yield spread between BAA corporate bonds and Treasury Rates (referred to as SBAA hereafter). It is a key parameter I use to gauge the risk premiums of corporate bonds relative to risk-free interest rates. As seen, the SBAA has recently narrowed to the lowest levels in the past 30 years....

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