The spike in Treasury yields this week has thumped bond exchange traded funds with longer durations, including the largest ETF for investment grade corporate debt.
The iShares iBoxx InvesTop Investment Grade Corporate Bond Fund (NYSEArca: LQD) fell 1.2% on Wednesday to drop below its 50-day simple moving average for the first time since December.
The corporate bond ETF is up about 3% the past three months. “High-quality corporate bonds offer relatively safe income and typically yield more than Treasury bonds because of their credit risk,” Morningstar says in an analyst report on LQD.
However, the ETF has an effective duration of 7.5 years, which “exposes it to substantial interest-rate risk,” says analyst Timothy Strauts. “When rates rise, the fund’s longer duration could cause price declines in the fund. Also, if inflation increases, as many have predicted, that will be another negative on fund returns.”
Popular ETFs tracking high-yield corporate bonds or “junk” such as iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK) held up much better than the investment grade fund on Wednesday. [ETF Spotlight: High-Yield Bonds]
In Treasuries, the jump in yields has triggered a rally in inverse ETFs that short bonds. Some institutional investors have been positioning for higher yields with these bearish funds. [Shorting Treasury Bonds with ETFs]
Some have been anticipating movement into corporate bonds, but LQD “peaked in early March” and suffered one of its worst days in months on Wednesday, according to CNBC.com’s Trader Talk blog. “This is not that surprising–investment grade bonds usually trade at a spread to Treasuries.” [Rising Yields Punish Treasury ETFs]
iShares iBoxx InvesTop Investment Grade Corporate Bond Fund
