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ETF Specialist

Corporate Credit Spreads on the Rise

In light of the increased compensation being offered by the asset class, we spotlight a corporate-bond ETF with limited interest-rate risk.

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Along with the rise in uncertainty and market volatility, the risk premiums in corporate bonds have also increased. The predominant concern for the bond market lately has been focused on the potential timing and magnitude of a change in policy from the Federal Reserve regarding interest rates. Indeed, since U.S. Treasuries are essentially risk-free (absence of credit risk), interest-rate risk is the primary issue. On the other hand, corporate bonds are exposed to credit risk, which is reflected in the yield premium they offer over Treasuries of comparable duration.

Like Treasuries, corporate bonds also court interest-rate risk. But that sensitivity to interest rates can be somewhat offset by credit risk. The higher premiums offered by corporate bonds can counterbalance price declines associated with rising interest rates. That said, yield-starved investors helped drive risk premiums to levels that didn't seem to fairly compensate for the risks being assumed. Recently, however, credit spreads have widened considerably since touching post-crisis lows in the summer of last year.

John Gabriel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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