As more companies try to meet shareholders’ demand for greater buybacks and dividends, firms are dipping into the debt markets to raise cash, potentially fueling risks for investment-grade bonds and related exchange traded funds.
Some companies are borrowing money from the bond markets to assuage shareholders, notably those aggressive activist investors who are pushing for greater value in their investments, reports Robin Wigglesworth for Financial Times.
Consequently, some observers and analysts contend that there is a growing credit risk, and these investment-grade-rated companies run the risk of potential credit downgrades if they continue to borrow, especially with average yields down to 2.8% from the long-run average of almost 7.9%.
“The investment grade space doesn’t look attractive right now, because of tight spreads, the rise of activism and creeping leverage,” Jim Keenan, head of credit at BlackRock, said in the FT article. “Bondholders don’t have the same voice as shareholders, except what we charge.
The potential risks could weigh on the investment-grade bond market and popular intermediate corporate debt ETFs. For instance, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) and SPDR Barclays Intermediate Term Corporate Bond ETF (NYSEArca: ITR) have been popular plays in an stubbornly low interest rate environment. [Bond ETFs Extend Record Inflows]
LQD has a 8.18 year duration and a 2.91% 30-day SEC yield. CIU has a 6.5 year duration and a 2.87% 30-day SEC yield. ITR has a 4.42 year duration and a 2.17% 30-day SEC yield.