With expectations that interest rates won’t jump up any time soon, higher quality corporate debt and related bond exchange traded funds are beginning to outperform speculative-grade securities.
The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) is up 1.0% over the past month and up 4.1% year-to-date. Meanwhile, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) rose 0.4% over the past month and is up 2.9% year-to-date. [A Revival in Corporate Bonds, ETFs]
The majority of gains is coming out of later-dated securities as global investors pile into new long-term bond issuance in recent weeks, Financial Times Reports.
Investors are beginning to ease concerns on duration exposure – the measure of a bond fund’s sensitivity to changes in interest rates, especially as yields on benchmark 10-year Treasuries fell about 30 basis points so far this year.
For example, the Vanguard Long-Term Corporate Bond ETF (NYSEArca: VCLT) is up 8.4% and SPDR Barclays Long Term Corporate Bond ETF (NYSEArca: LWC) increased 8.9% year-to-date.
VCLT has an average duration of 13.5 years and a 4.61% 30-day SEC yield. LWC shows a 13.62 year duration with a 4.55% 30-day SEC yield. In comparison, LQD comes with a 7.7 year duration and a 3.18% 30-day SEC yield.
Additionally, Matt Toms, head of US public fixed income for ING Investment Management, argues that investment-grade corporate debt has become more attractive in light of higher volatility after a multi-year rally in equities. [Bond ETFs Still Have a Place In Your Investment Portfolio]
“Equities have had a good run and now volatility has started to increase,” Toms said in the article. “Some managers, specially those catering to the institutional and pension fund community, simply do not want to handle any potential sell-off in the stock markets. For them, this is a good opportunity to sell and move to the longer portion of the high-grade market.”
For now, bond investors are staying put as inflationary pressure and interest rates remain low.
For more information on corporate debt, visit our corporate bonds category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of LQD and HYG.