The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) is down just 1% this year, but renewed risk appetite, which is bolstering riskier assets, could send investors out of previously beloved safe-haven assets.
Due to the growing popularity and vast liquidity of corporate bond-related ETFs, more investors have turned to ETFs as a way to play the corporate debt market as opposed to trading less liquid individual debt securities. For instance, according to Markit, a monthly average of 7 billion euros of contracts linked to high-yield bond indices in Europe and the U.S. were bought and sold since the market started electronically confirming trades in March.
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.
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]
“US corporate bonds started 2016 with the worst performance in 16 years and borrowing costs for investment-grade companies soared to a four year high in late January as Standard and Poor’s warned on the outlook for corporate borrowers. Morgan Stanley was out with a call on February 8th noting that Investment Grade Bonds are cheap and one of the few attractively valued, lower-beta investment opportunities in fixed income. Investment grade valuations have fallen to recessionary levels as credit risk has risen,” according to See It Market.
While investment-grade corporate bonds may be offering compelling value at the moment, near-term traders need to be mindful of LQD’s technical outlook.
“On the chart, LQD broke its 5 year uptrend back in December and is now breaking under its monthly IchoMoku Cloud. LQD also put in a major double top and the next key level is the $111 support from 2013 weakness, while a move below sets up for a longer term measured move down to $99. Monthly RSI has already broken down well below the 2013 level,” adds See It Market.
iShares iBoxx $ Investment Grade Corporate Bond ETF
Tom Lydon’s clients own shares of LQD.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.