With global central banks maintaining loose monetary policies that have pushed down government debt yields – over $10 trillion in international government bonds have negative yields, yield-starved investors will look toward riskier assets, like corporate bonds, to generate more attractive payouts.
Since many overseas central banks have enacted negative rate policies, international investors may also turn to the attractive yields in U.S. markets and further support U.S. corporate bonds. According to recent data from the U.S. Treasury, foreign investors have already picked up $146 billion in U.S. corporate bonds in the 12 months ended July.
Consequently, given the BOJ’s and Fed’s decisions, we can see greater demand for corporate bonds from both domestic and foreign investors.
ETF investors who are interested in U.S. corporate bond exposure have a number of options available. For instance, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) has a 8.48 year duration and a 2.95% 30-day SEC yield, Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) has a 6.5 year duration and a 2.77% 30-day SEC yield, and SPDR Barclays Intermediate Term Corporate Bond ETF (NYSEArca: ITR) has a 4.46 year duration and a 2.20% 30-day SEC yield.
Those wary of the potential credit risks should keep in mind that these corporate bond ETFs focus on investment-grade debt securities. Specifically, LQD has 2.4% in AAA-rated corporate bonds, 12.5% AA, 40.2% A and 44.6% BBB. VCIT includes 1.3% Aaa, 7.9% Aa, 36.5% A and 54.3% Baa. ITR holds Aaa 1.0%, Aa 12.4%, A 37.2% and Baa 49.1%.