Investment-grade bond exchange traded funds have experienced a pullback as investors anticipate Fed “tapering” and rising rising rates, but this may only be the beginning.
“Interest rates simply rose too fast, and for now we think the rotation out of bond funds will contribute more spread widening,” Back of America analysts led by Hans Mikkelsen said in a report. If yields continue to rise, “we could see massive outflows from high-grade bond funds and a much more disorderly rotation with significantly wider credit spreads. This scenario remains clearly the biggest risk to high grade this year.”
According to Bank of America Merrill Lynch, investment-grade debt has declined over 6% since May 2, reversing a year’s worth of returns, reports Charles Mead for Bloomberg. [Investors Selling Bond ETFs as Rates Rise]
The 10-year Treasury yield was at 2.59% Tuesday, compared to the record-low 1.379% on July 25, 2012. The five-year average yield is 2.75%.