As the European Central Bank and Bank of Japan implement aggressive quantitative easing measures, income-starved investors overseas are eyeing the relatively attractive yields in the U.S., potentially supporting U.S. corporate bonds and related exchange traded funds.
Almost $8 trillion in global bonds have negative yields, which has pushed fund managers from around the world to acquire U.S. corporate debt where interest rates are in the green, Bloomberg reports.
“Draghi has forced me as a European investor to look at overseas holdings that aren’t euro-denominated,” James Tomlins, a high-yield money manager at M&G Investments, told Bloomberg. “The potential for returns is much better in the U.S.”
Additionally, eight of 11 Japanese regional banks surveyed by Bloomberg recently stated they’ve begun or are considering riskier securities outside of their domestic market.
“We have to turn to foreign bonds, such as U.S. and European notes, or alternative products, to meet business expectations for securing profits,” Yoshihiro Yamanaka, an executive officer at Bank of Kyoto Ltd., told Bloomberg.
Consequently, according to Bank of America Merrill Lynch index data, risk premiums on U.S. investment-grade corporate debt have been cut by half a percentage point since mid-February due to rising demand from Asian and European investors. Hans Mikkelsen, head of U.S. investment-grade credit research at Bank of America Merrill Lynch, anticipates that by the year-end, premiums could dip to about 1.5 percentage points from current levels of around 1.72 percentage points as European and Asian investors funnel as much as $500 billion into American corporate bonds in 2016, or up 50% year-over-year.
“For global investors, investment-grade investors, there is only one game in town, and that is U.S. corporate bonds,” Bank of America’s Mikkelsen added.
Meanwhile, U.S. fixed-income investors can capture the potential growth opportunity in investment-grade corporate debt through ETF options. Investment-grade corporate bond ETF exposure include options like 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).
[related_stories]LQD tracks the Markit iBoxx USD Liquid Investment Grade Index, which is comprised of over 1000 high quality corporate bonds. The bond ETF is heavy on banking bonds at 26.4% of the underlying portfolio, followed by non-cyclical consumer 17.8%, communications 13.6%, energy 9.7% and technology 8.5%. The portfolio is comprised of investment-grade A-rated debt 44.0%, along with 43.2% in lower quality investment-grade BBB-rated debt. LQD has a 8.28 year duration, a 3.46% 30-day SEC yield and a 0.15% expense ratio.
VCIT follows the Barclays U.S. 5-10 Year Corporate Bond Index, which is comprised of about 1,700 investment-grade U.S. corporate bonds. The Vanguard option includes a larger 63.5% toward industrial companies and 30.9% in finance-related firms. The underlying portfolios credit risk is also largely made up of Baa 52.8% and A 38.6% debt. VCIT has a lower 6.5 duration, a 3.40% 30-day SEC yield and a 0.10% expense ratio.
ITR tracks the performance of the Barclays Intermediate US Corporate Index, which includes over 3,000 investment-grade corporate debt securities. The SPDR ETF option includes a similar 36.4% financial and 58.9% industrial breakdown. The fund, though, has a slightly higher quality mix, with a 10.2% in Aa rated debt, 40.3% in A, and 47.4% in Baa. ITR has a 4.39 year duration, a 2.77% 30-day SEC yield and a 0.12% expense ratio.