After the recent sell-off in high-yield bonds, investors should take a second look at investment-grade corporate bond exchange traded funds as a more stable play for the fixed-income market.
Analysts at the Schwab Center for Financial Research argue that investors should be buying bonds from higher-rated companies, reports Mike Cherney for the Wall Street Journal.
Collin Martin, senior research analyst at Schwab, points out that investment-grade debt weathered the shocks in the fixed-income market when investors dumped junk bonds. He argues that the selloff revealed liquidity issues in the high-yield market where it was more difficult to buy and sell low-quality debt, compared to higher-rated securities.
For the month ended Aug. 1, iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) declined 2.9%. Meanwhile, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) was up 0.3% and Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) was 0.2% higher.
“With high-yield bonds, we don’t think we’re going to see a big pickup in the default rate, but we do think at current levels, yields don’t really justify the risks involved,” Martin said in the article. “We’d wait for a better entry point in high yield, and for now we continue to focus on investment grade.”
According to Barclays data, high-yield, junk bonds have a yield of 5.25%, or a 3.65 percentage point spread over benchmark U.S. Treasuries. Junk bond yields were at 4.83% at the end of June, with a spread of 3.23 percentage points to Treasures. In comparison, investment-grade bonds, which are yielding 2.91% with a spread of 1.02 percentage points, remain largely unchanged from the end of June when yields were 2.92% with a spread of 0.97 percentage points.