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How to Play Defense with Corporate Bonds

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COLLIN MARTIN: Risks are rising in the corporate bond market, and we think that it’s time to play defense with your corporate bond investments and consider moving up in credit quality. The amount of corporate debt outstanding has surged over the past decade, and corporate profitability is expected to slow this year, but one of the biggest risks we see is that the makeup of the investment grade corporate bond market has shifted dramatically, with lower-rated issues making up a growing share of the market.

So how do you play defense in today’s markets? First, take a look at what type of corporate bond investments you own. Investment grade corporate bonds and high-yield corporate bonds are very different types of investments. High-yield corporate bonds are lower-rated, are much more aggressive, and are more likely to suffer bouts of price volatility or sharp price declines. If investments like that don’t match your risk tolerance, you might want to consider moving up in credit quality, reducing your exposure to high-yield bonds, and shifting that into investment grade corporate bonds.

Second, there are ways to play defense within the investment grade corporate bond market itself. Within the investment grade corporate bond market, bonds can be rated as high as triple-A, or as low as triple-B. Triple-B is just one notch above high yield or junk territory, and they come with increased risks. Today, more than half of all investment grade corporate bonds are rated triple-B compared to about a third of the market just ten years ago. So, if you own investment grade corporate bonds, you’re likely taking more credit risk than in the past.

So, if you own individual bonds, take a look at the credit ratings of your individual corporate bonds. If you notice a lot of triple-B rated issues, you might want to consider lightening up exposure there, reducing exposure there, and consider moving up into higher-rated bonds like those rated A or above.

It’s a bit more difficult to play defense within the mutual fund or ETF markets. These types of investments are meant to track an index, and the indexes they track likely have a lot of exposure to triple-B rated bonds. So, what you can do is try to find alternatives, find funds, that focus more on the higher-rated parts of the market, again, like those rated A or better, or you can pair your existing corporate bond investments with higher-rated investments like U.S. treasuries, which will help boost the overall credit rating of your fixed income portfolio.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

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Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixedincome investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

The Bloomberg Barclays U.S. Corporate Bond Index covers the U.S. dollar-denominated investment-grade, fixed-rate, taxable corporate bond market. Securities are included if rated investment-grade (Baa3/BBB-/BBB-) or higher using the middle rating of Moody’s, S&P and Fitch ratings services.

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