Propping up the rally in the government bonds and fixed-income-related exchange traded funds, Corporate America has been adding Treasuries and mortgage-backed securities onto their corporate portfolios in anticipation of potential volatility ahead.
In an attempt to hedge risks associated with a struggling Eurozone and potential Federal Reserve policy changes that could weigh on corporate earnings, corporate bond portfolios have increased U.S. government debt allocations by 15% this year through September, compared to a 6.5% rise for the same period last year, reports Tim McLaughlin for Reuters.
Corporate bond funds usually hold a range of debt and other conservative assets, including mortgage-backed securities, U.S. Treasuries and bonds backed by student loans, credit cards and auto loans.
The greater interest in Treasury debt indicated that corporate money managers expected growing volatility. Consequently, the surge in corporate interest for government debt has helped fuel a rally in Treasury bonds and related ETFs. Year-to-date, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) has increased 8.5% while theiShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) jumped 21.2%. [Volatile Market Sends Investors to Some Familiar ETFs]
Mortgage-backed security ETFs have also strengthened. Year-to-date, the iShares MBS ETF (NYSEArca: MBB) is up 5.7% and Vanguard Mortgage-Backed Securities Index ETF (NYSEArca: VMBS) is 5.2% higher.
Meanwhile, economic weakness ahead could translate to lower earnings and weigh on corporate debt securities.
Matt Toms, head of fixed income at Voya Investment Management, has been buying mortgage-backed securities while cutting down on corporate bonds. Toms argues that financial companies are exposed to the weakness in Europe. In contrast, mortgage-backed securities focus on the U.S. economy and are backed by the improving U.S. housing market. Toms, who runs the Voya Intermediate Bond Fund, has almost two-thirds of his portfolio assets in government bonds or government-related securities.