Investment-grade corporate bond exchange traded funds could maintain their momentum on improving fundamentals.
Year-to-date, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) gained 5.8%, Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) rose 4.9% and SPDR Barclays Intermediate Term Corporate Bond ETF (NYSEArca: ITR) advanced 3.5%.
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The corporate debt market may continue to strengthen as new issuances peter out and yield-starved foreign investors jump into U.S. markets.
While global issuance of non-financial company debt will be in excess of $236 billion by the end of May, the new supply won’t be able to meet investor demand as easy-money monetary policies push yields on over $9 trillion of bonds worldwide below zero, Bloomberg reported.
[related_stories]“Deals continue to be very much oversubscribed,” said Travis King, head of investment-grade credit at Voya Investment Management, told Bloomberg. “It is very difficult to get bonds, especially in the hotter deals.”
Investors now demand an average yield of 1.54 percentage points above Treasuries to hold U.S. corporate bonds, compared to 2.21 percentage points in February. Hans Mikkelsen, head of high-grade credit strategy at Bank of America, said that the spread could tighten even further as June supply falls short of demand that’s been driven by foreign investors, estimating that foreign investors will buy $400 to $500 billion in U.S. bonds this year, or 38% of the market if issuance matches 2015 levels.
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“It seems like the foreign buying story is just as strong as we expected,” Mikkelsen told Bloomberg. “We have too much money and too few bonds, and that’s not even counting the meaningful inflows we now have to bond funds and exchange-traded funds.”
On the supply side, seasonal declines in issuance, along with decisions of some firms to accelerate debt sales in May, indicate U.S. volume will be in the $75 billion to $85 billion range, or half of this month’s supply, according to Bank of America Corp. Vincent Murray, who heads U.S. fixed-income syndicate at Mizuho Securities USA in New York, also believes bond issuance will be less than $100 billion in June.
For more information on the fixed-income market, visit our bond ETFs category.