Investment-grade corporate bonds may have lagged the overall broad market’s gains, but from a bond standpoint, their performance has been outstanding. Jeffrey R. Kodnett for Kiplinger asks what can be expected from single-A to triple-B bonds. (Other types of bonds in high demand).

• Companies are issuing 60% more bonds than one year ago.
• Trading volume remains high while yields are down, which signals demand.
• It may be too early to sell, although we’re late in the bond cycle, Kodnett says. For corporates to lose their luster, the currently negligible yields for cash alternatives — such as Treasury bills, bank deposits and money-market funds — will have to improve.

Investors appear to be losing their risk appetite and instead seek a dependable, steady income, much like the bond market yields. Be sure to mind the trendlines if you decide to go into the market, and have a strategy in place to keep losses at a minimum. (How to follow trends).

• iShares iBoxx $ Investment Grade Corporate Bond (NYSEArca: LQD): up 8.9% year-to-date; yield 5.3%

For more stories about bonds, visit our Bond ETF category.

For full disclosure, Tom Lydon’s clients own shares of LQD.

John Spence of Market Watch said that taxable bond ETFs brought in the biggest gains in assets in September. Year-to-date,  taxable bond ETFs have brought in about $26.7 billion of new assets, which makes it the most popular ETF category so far in 2009. (How to use ETFs to diversify away from the dollar).

Not all bond ETFs are created the same.  The iShares Barclays TIPs Bond ETF (NYSEArca: TIP) has been one of the most popular, doubling in size to boast nearly $16 billion in assets.  What makes TIPS so attractive is that they enable investors to hedge against inflation because their returns are based on the rate of inflation. (How TIPS work).

Other TIPS ETFs include:

• PIMCO Broad U.S. TIPS (NYSEArca: TIPZ)
• PIMCO 15+ Year U.S. TIPS (NYSEArca: LTPZ)
• PIMCO 1-5 Year U.S. TIPS (NYSEArca: STPZ)
• SPDR Barclays Capital TIPS (NYSEArca: IPE)

Another class of bond ETFs that has seen nice growth is investment-grade corporate bond ETFs.  Take a look at the iShares iBoxx Investment Grade Corporate Bond Fund (NYSEArca: LQD), which has about $13 billion in assets, a yield of 5.3% and is up 8.3% year-to-date.

In addition to bond ETFs seeing growth and an inflow of assets, commodity ETFs and emerging market ETFs have as well, thanks much to risk appetite coming back into the marketplace. (Five ways to fight inflation with ETFs).

For more stories on bond ETFs, visit our bond ETF category.

For full disclosure, Tom Lydon’s clients own shares of LQD.

Kevin Grewal contributed to this article.

As a rule of thumb, bonds and ETFs that track them invest in stocks that can be hard to trade. As investors continue to seek returns within the fixed income market, especially with ETFs, the indexes upon which the funds are based are becoming compromised, reports Randall W. Forsyth for Barron’s. (Why high-yield bonds are in favor).

A case in point is the rapid expansion of the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD). LQD rose to $13.3 billion in assets to become the ninth-largest ETF in the United States. iShares found itself in a position in which it had to accommodate the new growth and broaden the criteria for bonds that are eligible to be included in LQD.

The vast majority of corporate and municipal bonds do not necessarily trade every day, Forsyth points out, including the issues included in the indexes upon which ETFs are based.

That said, bond ETFs are still enormously popular. They’ve gotten more than half of the new cash flowing into ETFs, reports Eleanor Laise for The Wall Street Journal. Bond ETF providers are aware of the challenges in building bond ETFs, and strive to build them so that their ETFs work optimally. (Why bonds are so popular).

For more stories about municipal bonds, visit our municipal bond category.

For full disclosure, Tom Lydon’s clients own shares of LQD.

According to Randall W. Forsyth of Barron’s, the rally has been specifically seen in the credit markets, in particular corporate securities as opposed to lower-risk Treasury securities.

One reason that bond ETFs are remaining attractive it because the credit markets are giving investors a better return than the near-zero return earned in money-market and cash accounts.  Additionally, with the ever-growing number of options available, bond ETFs enable investors to make both bearish and bullish plays on the market.

If the economy improves, corporate credit will benefit. If this happens, Treasury yields are apt to rise. Conversely, if the economy falls short of the bulls’ expectations, Treasury yields may fall but corporate spreads could widen and hurt corporate bond returns. Have a strategy in order to protect yourself.

The iShares iBoxx $ Investment Grade Corporate Bond (NYSEArca: LQD) is up 9.3% year-to-date and has a yield of 5.33%.

The SPDR Barclays Capital High Yield Bond Fund (NYSEArca: JNK) is up 31.3% year-to-date with a yield of 12.9%.

Even municipal bonds have seen a nice uptrend.  Take a look at the iShares S&P National Municipal BondETF (NYSEArca: MUB) which is up 8.7% year-to-date with a yield of 3.63%.  Additionally, State Street Global Advisors recently launched the SDPR Standard & Poor’s VRDO Municipal Bond ETF (NYSEArca: VRD),which is designed to provide investors with access to muni variable-rate demand obligations.

For more stories on bond ETFs, visit our bond ETF category.

Kevin Grewal contributed to this article.

For full disclosure, Tom Lydon’s clients own shares of LQD.

Short-term incentives and measures to stoke the economy are not fixing the real problem of sustained growth as businesses reduce payrolls, bank lending contracts, and consumers save more and spend less, comments Steven Pearlstein for The Washington Post.

The Federal Reserve took bold and necessary steps to prevent the collapse of the financial system. But the Fed also created so much liquidity that some fear that another financial bubble is forming.

As the money flew off the printers, the Fed was cutting interest rates in inter-bank lending to basically zero. However, banks kept interest rates unchanged for everyone else, and the result is that “spreads” between bank-to-bank lending and lending to everyone else are close to record highs.

The entities that are actually borrowing are hedge funds and other investors who use the money to purchase stocks, corporate bonds and commodities, pushing prices higher. Some ETFs to watch for activity include:

• DIAMONDS Trust, Series 1 (NYSEArca: DIA): up 14.0% year-to-date
• PowerShares QQQ (NasdaqGM: QQQQ): up 43.3% year-to-date
• SPDRs S&P 500 (NYSEArca: SPY): up 19.1% year-to-date
• iShares iBoxx $ Invest Grade Corp Bond (NYSEArca: LQD): up 8.9% year-to-date
• iShares S&P GSCI Commodity Indexed Trust (NYSEArca: GSG): up 4.9% year-to-date

The excess liquidity is also being used to finance new “carry trade,” borrowing at low U.S. rates to buy bonds in places with higher rates.

• POWERSHARES DB G10 (NYSEArca: DBV): up 17.7% year-to-date

The Central Bank is determined to stay its course, using anything that will strengthen the balance sheets. Fed officials won’t be increasing interest rates and reducing liquidity until they decide the economic recovery has a proper foothold.

For full disclosure, Tom Lydon’s clients own shares of LQD and QQQQ.

Max Chen contributed to this article.

Holdings

LQD has up to 100 holdings of highly liquid investment grade corporate bonds with an average bond rating of A and an average maturity of 12.27 years. Among its top components include Wells Fargo (WFC), American Express (AXP) and IBM (IBM).

Objective

This fund seeks to match the price and yield performance of the U.S. investment-grade corporate bond market by tracking the iShares iBoxx $ Investment Grade Index.

What You Should Know

• This fund has a low expense ratio of 0.15%
• With 100 holdings, this ETF and other bond ETFs give diverse exposure in a cost effective way
• Banks and financial services are the top sectors in the fund; it also contains oil and gas producters, tobacco, media and chemicals

The Latest News

• Corporate bond volumes have exploded worldwide this year, topping the $1 trillion mark
• Companies have been forced to seek other sources of funding because of a tight credit environment, report Sonja Cheung and Clare Connaghan for The Wall Street Journal
• The utility and energy sectors have contributed to the rise the most, issuing $188.4 billion so far this year
• 90% of these issuances have been investment-grade bonds

For full disclosure, Tom Lydon’s clients own shares of LQD.

Many ETFs have been trending higher in recent weeks, says Gary Gordon for ETF Expert. The pattern of the funds recovering indicates that while investors are more willing to take on risk than they were a year ago, there is still some fear lingering.

The stimulus package is proving to lead to increasing business access to credit and government-stimulated GDP.

Some of the ETFs that have been on the move by varying degrees in the last month or so include:

• iShares Investment Grade Bond (LQD)
• iShares High Yield Junk (JNK)
• SPDR International Treasury Bond (BWX)
• JP Morgan Emerging Market Bond (EMB)
• iShares S&P Preferred Index (PFF)
• iShares Lehman Treasury 20-Year Treasury Bond (TLT)
• Vanguard Total U.S. Market (VTI)
• Vanguard Developed Europe Pacific (VEA)
• Vanguard MSCI Emerging Markets (VWO)

TLT’s presence on the list is evidence that there’s still some worry hanging around. Treasury debt prices rose on Wednesday, in fact, as investors wondered whether the recovery had staying power, reports  John Parry for Reuters. Investors also don’t seem to be up for taking on much risk via commodities, Gordon points out.

There will still be market pullbacks and corrections as well as profit-taking, but pick your spots. There are several areas that are in uptrends – you just have to look for them. At ETF Trends, we use the 200-day-moving-average to spot market trends and patterns.

For more stories about trend following, visit our trend following category.

Those businesses representing the biggest risk are the ones that are really basking in the glow of July’s rally in the S&P 500.

The winning stocks have been the companies with a rating of BB or lower, also known as “high-yield junk,” explain Jennifer Alban and Rodrigo Campos for Reuters. Shares prices for junk companies are up between 21%-29% as of Aug. 4. By comparison, investment-grade companies with a BBB rating and higher are up 9.5%-19.25% for the same period.

Part of the reason for this rally is that the most beaten-down areas and sectors tend to have the furthest to go in a recovery. Companies with high credit ratings have a tendency to weather challenged markets better, so when a rally takes place, they usually don’t skyrocket.

Some analysts believe that the recent junk rally can’t sustain itself unless higher quality companies join in on the growth sooner rather than later. The higher-rated companies have less growth potential, though, so their earnings prospects may need more time to kick in.

Have a strategy and a stop-loss in place to protect yourself when the trend shows signs of ending.

In the meantime, here are some ways you can get this exposure with ETFs:

• iShares iBoxx $ High Yield Corporate Bond (HYG): up 10.2% year-to-date

• iShares iBoxx $ Investment Grade Corporate Bond (LQD): up 0.7% year-to-date

• SPDR Barclays Capital High Yield Bond (JNK): up 24.7% year-to-date

For full disclosure, Tom Lydon’s clients own shares of LQD.

For more stories about bonds, visit our bond category.

The corporate high-yield bond market has rallied around 30% over the last few months as the economy slowly but surely finds some footing, explains Sasha Gera for Financial Post. The average “junk” company is no longer distressed.

Less risky investment-grade corporate bonds are also finding a measure of appeal. U.S. companies raised $903 billion year-to-date, compared with $548 billion at the same time in 2008.

One risk to be mindful of, however, is the influx of corporate bonds as corporations restructure and renew debt. This could lead to an oversupply that would result in prices stagnating or falling, Gera notes.

Dena Aubon for Reuters reports that U.S. corporate bonds may indeed be poised for a pullback before the year is over, as yields have been cut by one-third.

Be prepared with a strategy before investing in this market and be sure to mind the trendlines. Is it too late or too good to be true? These funds are above their 200-day moving averages, and you can’t fight the trend.

• SPDR Barclays Capital High Yield Bond (JNK) up 23.5% year-to-date

• iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD): up 4.5% year-to-date

• iShares iBoxx $ High Yield Corporate Bond (HYG): up 17.7% year-to-date

For more stories about corporate bonds, visit our corporate bond category.

For full disclosure, Tom Lydon’s clients own shares of LQD.

Last year, investors turned to Treasuries as a last ditch wealth-preservation effort. Today, Treasuries have been made less appealing as prices fall and the government runs up a deficit, according to Financial Planning. Tax rolls are also down at the state and city level, which doesn’t make the outlook for municipal bonds that much better.

But investors have alternatives that can give diversification and varying yields:

• Intermediate bond funds that include a mix of government, mortgage and investment-grade corporate bonds
• Treasury inflation-protected securities (TIPs)
• Non-government investments, such as corporate bonds

Treasury bond prices may continue to fall for the time being. The government is issuing more debt, the economy is stabilizing and the Federal Research is purchasing more Treasuries, a recipe for declining bond prices, says John Parry for Reuters. This has put the central bank in a quandary: lower demand for safe havens means higher yields, which threatens to keep a lid on consumer borrowing, further hampering economic growth.

• PowerShares Insured National Muni Bond (PZA): up 9.3% year-to-date; yields of 4.9%

• iShares Lehman 7-10 Yr Treasury Bond Fund (IEF): down 7.7% year-to-date; yields 3.9%

• iShares Lehman TIPS Bond Fund (TIP): up 3.2% year-to-date; yields 4.4%

• iShares iBoxx $ Invest Grade Corp Bond (LQD): up 4.5% year-to-date; yields 5.6%

For more information on bonds, visit our bonds category.

For full disclosure, Tom Lydon’s clients own shares of LQD and TIP.

Max Chen contributed to this article.