As stocks fall and interest rates rise, investors are more excited about corporate bonds than they have been in a generation. One of the side effects of the Federal Reserve’s tightening policy is that interest rates are rising everywhere, including in the corporate bond market. But as the pros point out, investors should be careful and consider things like credit risk and interest rate sensitivity as a recession could be looming. For this reason, bond investors are drawn to shorter-dated bonds, those in the 2-year and lower sector, which have the highest returns over the years, but are less risky than long-dated bonds. They also prefer higher quality over lower quality high yield or dated bonds. “If you look at investment-grade returns of 5.4% or more, that’s a level of return that investors haven’t experienced since 2009, and obviously that was a very different spread environment than we’re in now,” said Jonathan Duensing, head of Amundi Asset Management. in US fixed income. Bond prices tend to fall as yields rise, so investors who buy now may see their bonds fall in price if rates continue to rise. But Duensing said higher yields now act as a cushion against that for investors in shorter-dated bonds. “The yield is high. If you’re talking about a two- to three-year investment horizon, the vast majority of these investment-grade securities will actually mature,” he said. “If you invest in something with a 5% return for 2 years, you’re going to get that 5% return. There’s going to be some volatility there, but the bottom line is that the yield can buffer you. some volatility in the near term.” Stick to quality Investors can buy their own bonds in $1,000 increments of individual corporate debt, but strategists warn that it’s best to stick with top-quality bonds during this uncertain time of a possible recession. “What’s happening at the short end of the income curve is definitely good value, and I think it’s going to be a good investment,” said Gilbert Garcia, managing partner of Garcia Hamilton Associates. “Any widening of corporate spreads is likely to be offset by lower Treasury yields, but I would stick to high-quality names.” Garcia said he likes names like IBM and Apple. IBM’s 2-year bond yielded 4.71%, according to Tradeweb. It was rated A- by Standard and Poor’s and A3 by Moody’s. Apple’s 2-year bond, rated Aaa by Moody’s and AA+ by S&P, yielded 4.29%, according to Tradeweb. Garcia said he was running away from funding. “Financials themselves, banks and brokers are widening. Corporate bond spreads are probably going to widen, but when you’re that short, the loss gives you a lot of room before you lose money,” Garcia said. Garcia said he also likes Aflac, Walt Disney, Deere and Caterpillar. According to Tradeweb, Aflac has a 5-year yield of 4.88%, Deere’s 2-year yield is 4.42%, and Caterpillar’s 2-year yield is 4.46%. Anthony Watson, founder of Thrive Retirement Specialists, said he was in Dearborn, Mich. recommends his firm’s clients hold corporate bonds as one of nine asset classes. “We believe it makes sense to own this asset class. The way we choose to access corporate bonds is through a highly diversified low-cost index fund, and part of the reason for that is when it comes to corporate bonds, there’s more difficulty with them than with government bonds,” he said. Treasuries are affected by the length of maturity , while corporate bonds have credit risk and can be affected by credit downgrades, for example. Playing Through Funds A fund that tracks short-term corporates is the SPSB, SPDR Portfolio Short Term Corporate Bond ETF. 500, which has fallen more than 19%. The SPSB ETF tracks the Bloomberg 1-3-Year Corporate Bond Index, which is down 5.4% year-to-date. the loser is the popular iShares iBoxx $ Investment Grade Corporate Bond ETF L It also surpassed QD. The weighted average maturity is 13.22 years, according to BlackRock. There’s also the Vanguard Short-Term Corporate Bond ETF VCSH, which tracks the corporate bond index, down 8.5% this year. The iShares 1-5 Year Investment Grade Corporate Bond ETF IGSB is about the same. It tracks the ICE BofA 1-5 year US Corporate Index. There’s the PIMCO Enhanced Short Maturity Asset ETF MINT with a discount of 2.5% for the year. About half of ETFs are investment-grade loans. It also holds securitized assets and other short-term instruments. Watson said he prefers an ETF approach with multiple holdings because credit risk can be an issue. According to him, the tough position of the Fed worries the market that the central bank will drag the economy into recession. “That now means investors have to be rewarded more for taking on that credit risk. If we’re going to go into recession, some companies are going to struggle,” he said. He added that the change in interest rates has changed the perception of bond investments, which have been low-yielding for years. “I think there’s an opportunity in the space for a while. You have two different things. You have an economy that’s stagnant, slowing down and maybe heading into recession,” he said. “It will depend a lot on the Fed’s rate forecast.”