After the recent pullback in the fixed-income market, it may be a good time to dive back into investment-grade corporate and municipal bond-related exchange traded funds.
Wells Fargo’s fixed income strategist Jim Kochan argued that bonds look attractive when they are paying over 3% in interest, reports Amey Stone for Barron’s. Kochan also advised investors to stick to the intermediate duration range.
Specifically, the strategist pointed to corporate bonds rated BBB, BB or B – low investment-grade and high speculative-grade corporate debt securities, which yield an average 3.88% to 5.68%.
“There are some very good yields at that level in the market,” Kochan told Barron’s. “That segment also isn’t facing the same problems due to a flood of new supply that investment-grade corporates are struggling with. You don’t have to go further down in credit than that.”
Investment-grade corporate bond ETFs, like the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), include BBB-rated debt but they also include higher quality A-, AA- and AAA-rated securities. For instance, LQD includes 38.2% BBB, 48.0% A, 10.8% AA and 1.7% AAA. The ETF has a 3.35% 30-day SEC yield and a 7.98 year duration.
Investors can also take a look at the Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL). Fallen angels are corporate bonds that once held investment-grade credit ratings but, due to a variety of factors, were later downgraded to junk status. Fallen angel issuers tend to be larger and more established than many other junk bond issuers. Furthermore, since these fallen angels were formerly on the cusp of investment-grade status, this group of junk bonds typically has a higher average credit quality than many other speculative-grade debt-related funds.