Fixed income investors are well aware that bond prices and yields have an inverse relationship. When yields decline, bond prices tend to rise. This dynamic is a key reason why Federal Reserve (Fed) actions are closely monitored by market participants.
This price/yield relationship is consistent across the entire bond market, making Fed decisions particularly impactful for exchange-traded funds (ETFs) like the Neuberger Berman Flexible Credit Income ETF (NBFC). This fund truly lives up to its “flexible” designation, as it actively manages a diverse portfolio that includes both investment-grade and high-yield corporate debt. These two segments of the bond market are particularly relevant as investors speculate that the Fed may continue to lower rates.
In the context of Fed easing, the active management of NBFC becomes increasingly significant. One important concept that newer bond investors may overlook is options-adjusted spreads (OAS).
According to research from CME Group, “Looking at the OAS spreads between the Bloomberg U.S. Corporate Investment Grade (IG) Index and U.S. Corporate High Yield Very Liquid (HY) Index reveals different perspectives on risk and volatility within each of their respective credit markets.”
NBFC Built for This Environment
As financial advisors and investors recognize, junk bonds are particularly sensitive to fluctuations in interest rates. The recent gains in these bonds, including those within NBFC, can likely be attributed to expectations surrounding Fed easing. This sensitivity highlights the advantages of having an actively managed fund like NBFC.
According to CME, “Junk debt’s OAS is prone to relatively large and rapid increases, a direct reflection of the heightened risk and volatility in the high-yield bond market. This sensitivity makes it a powerful barometer for capturing market-wide risk appetite.”
When examining high-yield corporate debt, it’s important to note that its volatility is generally higher than that of higher-quality corporates. Investors are compensated for this additional risk through higher yields. However, by choosing NBFC, investors can also employ it as a strategy for mitigating volatility.
From the perspective of OAS, investors should anticipate significant differences in OAS behavior between investment-grade and high-yield corporates, especially when the Fed is adjusting borrowing costs. An ETF like NBFC can help alleviate concerns, as its management team handles the complexities for investors.
CME concludes, “The clear differences in the OAS behavior between the two indexes provide a compelling rationale for trading the spread between them. The HY less IG OAS spread is critical to credit traders who anticipate either a widening or tightening of the gap in credit premiums between the two markets.”
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