Money managers and investors bargain hunting in the wake of the market correction, and some are looking into U.S. corporate bonds and related exchange traded funds after the asset underperformed Treasuries in a risk-off environment.
For instance, since Wednesday, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) attracted $183.9 million in net inflows, according to ETF.com.
The interest in investment-grade corporate bonds comes as large money managers at Allianz Investment Management and Schroders Investment Management stated that they have also stepped in to buy U.S. corporate debt over the past few days, reports Min Zeng for the Wall Street Journal.
Many investors are picking back up riskier assets after the global volatility caused many to trim their risk appetites and preserve capital through safe-haven assets, like Treasuries.
U.S. investment grade corporate bonds have lost 0.5% so far this month and declined 1.5% over the past three months. Meanwhile, U.S. Treasuries have gained 0.28% and 0.48%, respectively, over the same periods.
Consequently, with yields on investment-grade corporate debt more attractive relative to Treasuries, investors may be jumping back on the corporate bond train.
Based on the option-adjusted credit spread of the Bank of America Merrill Lynch U.S. Corporate Bond Index over U.S. Treasuries, investment-grade corporate debt shows a credit spread of 172 basis points, a rise of 65 basis points over the past year, writes John Gabriel, a strategist for Morningstar‘s manager research team. In contrast, its historical average is 121 basis points since 1997.
LQD dropped 2.0% over the past three months but now offers a 3.63% 30-day SEC yield – bond yields and prices have an inverse relationship, so a falling price corresponds with rising yields.