With a strong possibility of the Federal Reserve raising interest rates in December, advisors and investors are once confronting what impact the central bank will have on fixed income portfolios and the corresponding exchange traded funds.
Although some investors recently departed investment-grade corporate bond exchange traded funds due to debate regarding the Federal Reserve’s next policy move, funds such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), SPDR Barclays Short Term Corporate Bond ETF (NYSEArca: SCPB) and the SPDR Barclays Intermediate Term Corporate Bond ETF (NYSEArca: ITR) still merit consideration by investors.
Investment-grade-rated debt issuers halted sales in August as a response to the sudden spike in volatility and uncertainty over a potential September Federal Reserve rate hike, reports Cynthia Lin for the Wall Street Journal.
The good news is that investment-grade corporates now look inexpensive and investors can use select ETFs to gain exposure to lower duration bonds that are less sensitive to fluctuations in interest rates.
As for a lack of new issues coming to market, well, the Fed has taken care of that.
“Government bond traders weren’t the only financial professionals to jump following the release of the October Fed policy statement, which suggested the Fed could liftoff as soon as December. Corporate finance execs also rushed to prepare bond offerings to take advantage of still low rates,” reports Amey Stone for Baron’s.
Bond ETFs track a basket of fixed-income securities. Consequently, the ETFs are only as liquid as their underlying assets. In times of heightened market volatility, the bond ETFs may see a heavy redemptions, and without the necessary buyers in the underlying market, bid-ask spreads with rise and prices could fall even further. [How ETFs Are Traded]
“Constituents of the iBoxx $ Liquid Investment Grade index and those of LQD have exhibited considerably more liquidity than the 16,500 investment grade $ bonds covered by the Markit bond universe in the first quarter of this year,” according to Markit.
“The flood of new issuance seems to have affected long-term bond rates Thursday, says Rick Rieder, chief investment officer of fundamental fixed income at BlackRock. The yield curve steepened that day when it had flattened Wednesday after the Fed announcement,” adds Barron’s.
iShares iBoxx $ Investment Grade Corporate Bond ETF
Tom Lydon’s clients own shares of LQD.