The safest corporate bond exchange traded funds have attracted their fair share of interest this year, with U.S. investment-grade corporate debt now trading below pre-recession levels, but the outperformance may not last.
Bonds have generated better returns than riskier debt for the first time since 2010 and the second time since 2006, the Wall Street Journal reports.
The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) has gained 5.4% year-to-date, whereas the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) is up 4.0% and SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) rose 4.2%.
LQD tracks investment-grade corporate debt with credit ratings of BBB or higher. The ETF has a 7.69 year duration and a 3.07% 30-day SEC yield.
HYG and JNK track speculative, or junk, bonds. HYG shows a 3.95 year duration and a 4.34% 30-day SEC yield, and JNK has a 4.21 year durationa nd a 4.73% 30-day SEC yield.
U.S. investment-grade corporate bonds have returned 4.8%, accounting for both interest payments and price appreciation, while the Barclays U.S. corporate high-yield bond index returned 4.3%.
Top-rated, investment-grade U.S. corporate debt is now trading at or even below pre-recession levels. New issue paper has cleared the market at spreads of 30 to 80 basis points, compared to benchmark Treasuries, according to Investing.
Bond prices have an inverse relationship to yields, so rising prices corresponds to falling yields.
However, some analysts argue that investors could be shifting into riskier, speculative-grade debt as the improving U.S. economy will sap away the rally in safe fixed-income assets. [Investors Seek Riskier Debt, Jump into Junk Bond ETFs]
“We have a preference for high yield at the moment,” Rachel Golder, who manages high-yield bonds and loans at Goldman Sachs Asset Management, said in the WSj article. “We are bullish on the U.S. economy and think that rates will begin to steadily move up and investment grade is more vulnerable.”
Bank of America Merrill Lynch now expects investment grade bonds to generate a 1.5% overall return for 2014, compared to the 4% to 5% rise in high-yield bonds.
“The returns you are getting in investment grade are the best you are going to have this year,” Mark Pibl, head of high-yield strategy at broker-dealer Canaccord Genuity Inc., said in the WSJ article.
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, HYG, and JNK.