Foreign central banks have enacted aggressive bond purchasing programs that have pushed down yields. As foreign investors seek out better returns, U.S. corporate bonds and related exchange traded funds have benefited from their relatively more attractive yields.
Hans Mikkelson, Bank of America Corp. credit strategist, pointed out that a scarcity of yields in foreign developed markets have caused a fresh wave of investors searching fore returns in the U.S. where investment-grade bonds provide eight times the amount available in places like the equivalent Eurozone markets, reports Tracy Alloway for Bloomberg.
Related: Rising Foreign Demand Could Support Corporate Bond ETFs
Foreign yields are being depressed by stimulus measures employed by global central banks, such as the Bank of Japan and the European Central Bank, which began buying investment-grade corporate bonds as a part of its quantitative easing program to stimulate the Eurozone economy.
“This extreme pricing action in Europe and Japan is, of course, the result of extreme monetary policy accommodation by the ECB and BOJ in response to economic weakness,” Mikkelson told Bloomberg. “No wonder we are seeing big foreign inflows to the U.S. corporate bond market, which is the only place that has yield, size and (relative) liquidity.”
[related_stories]Investment-grade corporate bond ETFs have also become popular plays in 2016. For instance, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) has attracted $3.7 billion in net inflows year-to-date, according to ETF.com.
Year-to-date, LQD gained 7.0%, Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) rose 6.1% and SPDR Barclays Intermediate Term Corporate Bond ETF (NYSEArca: ITR) advanced 4.4%.
Related: 28 ETFs for Investment-Grade Corporate Bond Exposure
Further fueling the rise in the corporate bond market, supply and demand fundamentals are supporting the forward momentum. Deutsche Bank AG analysts have also pointed out that mutual funds have acquired $275 billion worth of bonds sold by companies with relatively strong balance sheets in 2015 or far outstripping the net supply of new issues, Bloomberg reports.
“The $275 billion increase in mutual funds’ credit holdings was twice the level of credit supply last year,” Deutsche analysts led by Dominic Konstam, Deutsche’s global head of rates research, said in a research note.
Rob Elson, a Bloomberg strategist, also noted that money managers’ allocation to corporate debt hit a fresh all-time high last week at 36.3% of portfolios, compared to 19.1% in 1999.
For more information on the fixed-income market, visit our bond ETFs category.
iShares iBoxx $ Investment Grade Corporate Bond ETF