Corporate Bond ETFs in a Tough Spot

With yields on Treasuries pushing higher and more investors pricing in a Federal Reserve rate hike, some corners of the fixed income market are losing steam.

Investors are showing signs of concern with corporate bond exchange traded funds, including the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYESArca: LQD), the largest ETF that tracks investments-grade corporate debt.

Fixed-income investors would typically move down the yield curve to hedge against rising interest rate risks. However, while moving down the yield curve provides a greater level of safety, lower duration bond funds come with less appealing yields.

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Corporate debt funds have experienced billions in net inflows since the U.S. Federal Reserve left rates unchanged. Some observers argued that the inflows reflected the renewed interest in corporate debt after the prospect of a delayed tighter monetary policy.

Meanwhile, loose monetary policies abroad, including a bond-purchasing program out of the European Central Bank and Japan, have pushed foreign investors to the relatively more attractive U.S. securities, which provide much better yields in an environment where almost $13 trillion in global Treasuries trades with a negative yield.

Currently, the technical situation for some corporate bond ETFs is increasingly sensitive as investors wait on the Fed’s interest rate decision in December.