Corporate Bond ETFs in a Tough Spot as Investors Price In Rate Hike

With yields on Treasuries pushing higher and more investors pricing in a Federal Reserve rate hike, some corners of the fixed income market are losing steam.

Investors are showing signs of concern with corporate bond exchange traded funds, including the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYESArca: LQD), the largest ETF that tracks investments-grade corporate debt.

Fixed-income investors would typically move down the yield curve to hedge against rising interest rate risks. However, while moving down the yield curve provides a greater level of safety, lower duration bond funds come with less appealing yields.

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Corporate debt funds have experienced billions in net inflows since the U.S. Federal Reserve left rates unchanged. Some observers argued that the inflows reflected the renewed interest in corporate debt after the prospect of a delayed tighter monetary policy.

Meanwhile, loose monetary policies abroad, including a bond-purchasing program out of the European Central Bank and Japan, have pushed foreign investors to the relatively more attractive U.S. securities, which provide much better yields in an environment where almost $13 trillion in global Treasuries trades with a negative yield.

Currently, the technical situation for some corporate bond ETFs is increasingly sensitive as investors wait on the Fed’s interest rate decision in December.

LQD “moving in a triangle pattern since 2012, with rising trendline support intersecting at $113.30. The ETF peaked three times between $123.20 and $124.48 over the last five years. The November high of $124.48 could be considered a false upside breakout, which indicates the price is likely to keep heading lower toward trendline support. A breach of the multi-year rising trendline, and especially above a drop below $112.60, indicates a long-term downtrend in high-grade corporate bonds is underway,” according to Investopedia.

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Some fixed-income traders are growing concerned that the steadily rising prices and lower spreads could diminish the speculative-grade debt market’s ability to generate overall positive returns even as rising interest rates cut down the value on bonds.

HYG’s “next wave in the downtrend is likely starting, as a sharp drop off the $87.56 October high has broken the rising trendline for 2016 and taken out all major swing lows since August. This indicates a downtrend has begun in the short-term, which aligns with the long-term downtrend,” according to Investopedia.

For more information on the credit market, visit our corporate bonds category.

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