Speculative grade bonds come with attractive yields, but investors have started to hedge against riskier bets. Meanwhile, investment-grade corporate debt exchange traded funds are starting to outperform as investors move toward safety.
Given the recent bout of uncertainty in the equities markets, investors moved back into safety. Investment grade corporate offer a nice mix of yield and safety, an ideal combination in this market environment, writes Eric Dutram for Zacks. [iShares Launches Target-Date Corporate Bond ETFs to Hedge Rising Rates]
“U.S. corporations are doing very well. They have record amounts of cash on their balance sheets, and profit margins are at all-time high levels,” according to Morningstar analyst Timothy Strauts. “Defaults are not expected to be a major concern in the next few years, because companies have positioned themselves conservatively. Many equity investors feel that corporations are being too cautious and not taking enough risks. From a bond investor’s perspective the current air of cautiousness may allow credit spreads to tighten even further.”
Additionally, with deflationary pressures and a stubbornly high unemployment rate, the Federal Reserve does not look like it will tighten monetary polices any time soon, giving intermediate-term bonds more breathing room. [iShares: The Great Duration Rotation Continues – But For How Long?]