Speculative grade bonds come with attractive yields, but investors have started to hedge against riskier bets. Meanwhile, investment-grade corporate debt exchange traded funds are starting to outperform as investors move toward safety.
The iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD) has gained 2.2% over the past month while the iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG) rose 0.9%.
Given the recent bout of uncertainty in the equities markets, investors moved back into safety. Investment grade corporate offer a nice mix of yield and safety, an ideal combination in this market environment, writes Eric Dutram for Zacks. [iShares Launches Target-Date Corporate Bond ETFs to Hedge Rising Rates]
“U.S. corporations are doing very well. They have record amounts of cash on their balance sheets, and profit margins are at all-time high levels,” according to Morningstar analyst Timothy Strauts. “Defaults are not expected to be a major concern in the next few years, because companies have positioned themselves conservatively. Many equity investors feel that corporations are being too cautious and not taking enough risks. From a bond investor’s perspective the current air of cautiousness may allow credit spreads to tighten even further.”
Additionally, with deflationary pressures and a stubbornly high unemployment rate, the Federal Reserve does not look like it will tighten monetary polices any time soon, giving intermediate-term bonds more breathing room. [iShares: The Great Duration Rotation Continues – But For How Long?]