Find Your Investment Grade Edge with Undervalued Bonds
September 25, 2024
Read Time 2 MIN
Investment grade corporate bonds provide a yield pickup over risk-free U.S. Treasuries with limited credit risk. They are an attractive core fixed income allocation for many investors because of their relative safety, yield enhancement and diversification potential. In a large, core asset class such as this, is significant outperformance possible?
According to Moody’s Analytics, the answer may be “yes.” As shown below, the most attractively valued bonds within this $4.1 trillion asset class have significantly outperformed the broad market historically. In contrast, the most overvalued bonds have significantly underperformed the market. Value is measured by comparing the market pricing of a bond to its fair value, as calculated by Moody’s Analytics based on the bond’s forward-looking probability of default. Bonds that have a high market spread relative to fair value overcompensate investors relative to the risk they are taking. The outperformance from focusing on attractively valued bonds can come from bond prices adjusting upwards towards fair value as well as the ability to capture higher yields relative to the risk taken. In addition, outperformance can also come from avoiding overvalued bonds where market prices adjust downwards towards fair value.
Attractively Valued Bonds Historically Outperform the Broad Market
Source: Moody’s Analytics and ICE Data Indices. US Corporate Bonds: ICE BofA US Corporate Index (C0A0) tracks the performance of US dollar denominated investment grade corporate debt publicly issued and settled in the US domestic market. Undervalued Bonds: Top 20% of C0A0 ranked by the ratio of a bond’s option-adjusted spread to Moody’s Analytics’ fair value spread. Overvalued Bonds: Bottom 20% of C0A0 ranked by the ratio of a bond’s option-adjusted spread to Moody’s Analytics fair value spread.
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This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the speaker(s), but not necessarily those of VanEck or its other employees.
The Adviser has entered into a licensing agreement with Moody's Analytics to use certain Moody's Analytics credit risk models, data and trademarks. Moody’s Analytics® is a registered trademark of Moody’s Analytics, Inc. and/or its affiliates and is used under license.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© Van Eck Associates Corporation.
Disclosures
By clicking on the link to a non-VanEck webpage, you acknowledge that you are leaving VanEck’s website and acknowledge that you are entering a third-party website subject to its own terms and conditions. VanEck disclaims responsibility for content, legality of access or suitability of the third-party websites. VanEck provides links to third party websites only as a convenience and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. All persons accessing this link do so on their own initiative and are responsible for compliance with applicable local laws and regulations.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the speaker(s), but not necessarily those of VanEck or its other employees.
The Adviser has entered into a licensing agreement with Moody's Analytics to use certain Moody's Analytics credit risk models, data and trademarks. Moody’s Analytics® is a registered trademark of Moody’s Analytics, Inc. and/or its affiliates and is used under license.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© Van Eck Associates Corporation.