The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) and other investment-grade corporate bond exchange traded funds have been popular destinations for income-hungry investors this year. In fact, many foreign investors have been gobbling up U.S. corporate debt.
Higher-quality corporates also offer value.
“It also looks relatively attractive versus high yield. At the beginning of 2016, U.S. high yield spreads were among the widest versus investment grade since the financial crisis. A year later, that ratio is back near post-crisis lows. We see investment grade debt as attractive in the tradeoff between yield and risk,” adds BlackRock.
“U.S. interest rates, though still very low, were more attractive than many others around the world, where central banks pushed more than $12.9 trillion in debt into negative-yielding territory by last summer. Corporate America also issued a record mountain of debt last year, in an effort to lock in low interest rates — and debt payments — before more Fed interest rate increases. Foreigners were ready buyers,” reports CNBC.
Investors, though, do not need to sacrifice yields to diminish rate risk. Alternatively, investors can look to rate-hedged or zero-duration bond ETFs. The group of interest rate-hedged or zero duration ETFs hold long-term bonds but also simultaneously short Treasuries or Treasury futures contracts to hedge against potential losses if interest rates rise.
Due to their near-zero durations, the rate-hedged bond funds should show little to no sensitivity to changes in interest rates. These types of hedged-bond ETFs could provide suitable exposure to the fixed-income market in a rising interest environment ahead.
For instance, the iShares Interest Rate Hedged Corporate Bond ETF (NYSEArca: LQDH) holds short positions in interest rate swaps, which provides the rate-hedged ETF with a -0.01 effective duration, whereas the popular LQD has a 7.91 year duration. Additionally, the rate-hedging strategy does not sacrifice too much in yields as LQDH shows a 3.06% 30-day SEC yield, compared to LQD’s 3.54% 30-day SEC yield. The strategy should help an interest-rate-hedged ETF outperform its non-hedged options if rates continue to rise.
“The hunt for yield by foreign buyers also helped support a surge in U.S. debt offerings. U.S. corporations sold a record $1.3 trillion in investment-grade debt last year, and are on track for another record this year with $451 billion year to date, according to Informa Global Markets,” reports CNBC.
For more information on corporate debt, visit our corporate bonds category.
Tom Lydon’s clients own shares of LQD.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.