While equities markets were stuck within range and yields on benchmark Treasury notes slipped, investors plunged back into investment-grade corporate bonds and related exchange traded funds.
For instance, in the week that ended January 11, investment-grade corporate bond funds attracted $4 billion in net inflows, marking the funds’ largest inflows since early February 2015, Reuters reported.
Among the most popular ETF trades of the past month, the Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) attracted $1.6 billion in net inflows and iShares iBoxx $ Investment Grade Corporate Bond ETF (NYESArca: LQD) brought in $1.4 billion, according to XTF data.
“The relatively strong stability and income investment-grade corporate bonds provide are particularly appealing amid the uncertainty that has materialized to start the year,” Todd Rosenbluth, director of ETF & Mutual Fund Research at CFRA, told Reuters.
Safe-haven demand for fixed-income assets returned in January as investors grew wary of the recent Trump-induced rally in equities that pushed stocks to record heights. Many waited on further clarification from President Donald Trump’s administration on policy changes to justify the heightened valuations. However, some of Trump’s actions or lack of clarity triggered some risk-off action.
Looking further out, corporate credit may still remain a suitable play in the environment ahead. Barclays analysts predict that the Republican administration’s far-reaching tax reforms could boost the market by curbing the post-financial crisis jump in leverage for industrial issuers, which could buoy returns over the next decade, Bloomberg reports.
“A cut to the tax rate would increase the cash flow available to companies to service debt and, thus, improve credit quality,” the Barclays analysts wrote in a recent note. “Furthermore, we expect companies to decrease leverage because the tax shield benefit of debt would be reduced at lower tax rates, effectively increasing the after-tax cost of debt.”
As lower taxes provide companies with more power to service debt obligations from the new source of cash flow, the reduction in the tax rate would make borrowing in the bond market less appealing relative to equity funds, which would encourage companies to reduce gearing ratios. The reduced supply of corporate debt would help sustain current corporate bond prices.
For more information on the fixed-income market, visit our bond ETFs category.