Demand Favors Corporate Bond ETFs

July 11th at 9:30am by Tom Lydon

Strong demand for fixed-income investment options and corporate debt-related exchange traded funds have sent corporate bond sales to their highest level in five years.

Some of the world’s largest companies, such as Verizon, Walmart, Bayer, Cisco and Petrobras, as well as banks including Wells Fargo, Bank of America and BNP Paribas have isued over $1.8 trillion in new bonds for the first six months of the year, the highest total for the first half of a year since 2009, reports Vivianne Rodrigues for Financial Times.

“The need for cheap capital, combined with artificially low yields and euphoric demand for anything with the potential to offer higher returns, has created an environment that has fostered massive debt sales,” Adrian Miller, director for fixed income strategy at GMP Securities, said in the article.

Year-to-date, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) rose 5.9%, Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) gained 5.9% and PIMCO Investment Grade Corporate Bond Index ETF (NYSEArca: CORP) increased 6.1%.

LQD has a 7.75 year duration and a 3.1% 30-day SEC yield. VCIT has a 7.5 year duration and a 3.09% 30-day SEC yield. CORP tracks a shorter 1.94 year duration and comes with a 2.88% 30-day SEC yield.

Investment-grade corporate debt has been shining this year, outperforming other debt assets. The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), which has a 3.91 year duration and a 4.18% 30-day SEC yield, is up 4.5% year-to-date. Meanwhile, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a 7.6 year duration and a 2.51% 30-day SEC yield, returned 4.5% this year. [Investors are as Comfortable with Corporate Debt ETFs as Treasuries]

Credit risk remains low, with corporate default rates at 1.8%. The corporate bond market has experienced strong performance due to the falling yields in Treasuries and diminished inflation expectations this year.

LQD, the largest corporate bond ETF, has added nearly $981 million in new assets this year.

For more information on fixed-income market, visit our bond ETFs category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own shares of HYG and LQD.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.