Longer-Dated Corporate Bonds: A Bargain in Today’s Bond Market

Introduction: The Appeal of Longer-Dated Corporate Bonds

In today’s bond market, investors are discovering new opportunities to generate income, but one sector stands out as particularly attractive: longer-dated corporate bonds. According to Rick Rieder, BlackRock’s Chief Investment Officer for Global Fixed Income, these bonds not only offer solid yields but are also undervalued, making them a bargain for savvy investors. Rieder has recently started adding longer-dated corporate bonds to his iShares Flexible Income Active ETF (BINC), a fund with $7.69 billion in assets and a 30-day SEC yield of 5.57%. The fund’s net expense ratio is 0.4%, making it a cost-effective option for those seeking exposure to fixed-income assets.

Why Longer-Dated Bonds Are Attractive Right Now

While investment-grade corporate bonds have seen tight spreads, making them expensive, the situation changes when looking further out on the yield curve, particularly for bonds with maturities of 20 to 40 years. These bonds are trading at significant discounts, often between 60 to 80 cents on the dollar. For investors, this represents a compelling opportunity. As Rieder points out, investment-grade companies rarely default, and locking in yields of 5% to 6% on these bonds is a smart move.

The appeal of longer-dated corporates is amplified by their sensitivity to interest rates. With the Federal Reserve signaling that it is “not quite there yet” in achieving its 2% inflation target, interest rates may remain higher for longer. This has caused longer-dated bonds to be knocked down in price, creating a buying opportunity. Additionally, the supply of these bonds is relatively limited, as companies prefer issuing shorter-dated debt to avoid higher costs. At the same time, demand persists from institutional buyers like pensions and life insurance companies, which often need long-duration bonds to match their liabilities.

The "Sweet Spot" in Bond Maturities

While longer-dated investment-grade corporates are a bargain, they still make up only a small portion of Rieder’s fund. In fact, investment-grade debt accounts for just 12.6% of BINC’s holdings, with only 3.6% allocated to U.S. credit. Instead, the fund focuses on shorter-dated bonds, with maturities of 0 to 5 years. Rieder calls the two- to three-year range the “sweet spot,” as it balances yield potential with reduced interest rate risk.

For those willing to take on slightly more risk, the fund also holds high-yield bonds and loans, which make up nearly 41% of its portfolio. Rieder favors BB-rated high-yield bonds in Europe and B-rated high-yield bonds in the U.S., citing the quality of the issuers and the potential for attractive returns. Europe’s slower economic growth and the smaller size of its high-yield market also make it an attractive region for investors seeking value.

Diversification Across Asset Classes

In addition to corporate bonds, BINC allocates nearly 37% of its assets to securitized products, such as collateralized loan obligations (CLOs), commercial mortgage-backed securities (CMBS), non-agency mortgage-backed securities (MBS), and asset-backed securities. Rieder highlights the CLO market as particularly attractive, where even triple-A rated bonds can be purchased at favorable prices. Meanwhile, the CMBS market has faced challenges due to concerns about office real estate, but Rieder sees opportunities in specific segments, such as fully leased Class A office properties and lodging-related assets.

Conclusion: A Balanced Approach to Income Generation

Overall, BINC’s strategy reflects a balanced approach to income generation in today’s bond market. By combining shorter-dated investment-grade bonds, carefully selected high-yield debt, and securitized products, the fund aims to deliver strong returns while managing risk. Rieder’s willingness to look beyond the most actively traded sectors, such as longer-dated corporate bonds, underscores the importance of a nuanced and adaptable investment strategy in uncertain economic times. For investors seeking income and value, BINC’s diversified portfolio offers a compelling solution.