American Century's Greenblath Talks Corporate Bonds, Yields

Amid falling interest rates, American Century Investments' Jason Greenblath advocates for active fixed income management in corporate bonds to find significant yield opportunities despite tight spreads. He suggests targeting short-maturity, BB-rated high-yield bonds for mid-single-digit yields (6%+) and newer vintage bonds with higher coupons (5-7%), which can outperform broader index yields. The American Century Diversified Corporate Bond ETF (KORP) exemplifies this concentrated, active approach, aiming to provide investors with income and total return by selectively investing in 200-300 names and adapting to market events, positioning it as a potential core portfolio component for yield-seeking investors.

Analysis

Amid dropping interest rates and tight credit spreads, American Century Investments' Jason Greenblath advocates for an active fixed income approach within corporate bonds to uncover significant yield opportunities. He highlights targeting short-maturity, BB-rated high-yield bonds, which can offer mid-single-digit yields exceeding 6%, and newer vintage bonds issued with 5-7% coupons, contrasting favorably with broader index yields around 4.75%.

The American Century Diversified Corporate Bond ETF (KORP) exemplifies this strategy, employing a concentrated portfolio of 200-300 line items compared to the index's 8000, and charges a 29 basis point fee. KORP actively seeks opportunities by scrutinizing fundamentals and capitalizing on specific market events, including opportunistic investments in large issuers like AT&T (T) or JP Morgan (JPM) when spreads are expected to tighten.

This active management aims to deliver both yield and total return by focusing on bonds with attractive coupons and shorter maturities, avoiding the lower-coupon bonds issued during periods of near-zero rates. KORP's approach allows for adaptation to market conditions and deep scrutiny of potential investments, differentiating it from passive index strategies.

Greenblath suggests KORP could serve as a core portfolio component, offering concentrated corporate bond exposure with similar interest rate risk but a more dynamic strategy than the broader, government-debt-heavy Bloomberg Aggregate Bond Index, particularly for investors seeking additional yield in an uncertain market outlook for 2025.

Key Decisions for Investors

• Consider evaluating active corporate bond ETFs like KORP for enhanced yield and total return potential in a low-rate environment, given their ability to target specific bond segments and vintages.
• Investors seeking higher income should investigate strategies focusing on short-maturity, BB-rated high-yield bonds or newer vintage corporate bonds with higher coupons, as highlighted by American Century.
• Assess the trade-off between KORP's active management fee (29 bps) and its concentrated, event-driven approach against passive index alternatives, particularly for core fixed income allocation.