Investment-Grade Corporate Bond ETFs Suffered the Brunt of the Selling

The selloff in the fixed income market dealt a significant blow to investment-grade rated bond exchange traded funds, with debt issued by some of the safest U.S. companies suffering their second-worst start to a new year on record.

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), the largest investment-grade bond ETF by assets on the market, has been the second-most shunned ETF play so far in 2021, experiencing $7.6 billion in net outflows year-to-date, according to ETFdb data.

Meanwhile, bonds from highly rated companies have depreciated in value by 5.4%, accounting for both price change and interest payments, through March 18, the Wall Street Journal reports. This reflects their second-worst start in data going back to 1996. 2020’s pandemic-fueled selling was their worst performance since that time.

In comparison, high-yield bonds have returned a modest 0.2% and corporate loans to highly indebted borrowers even returned 1.7% over the same period.

Demand for investment-grade debt has waned on rising expectations that the vaccine rollout and new stimulus money will invigorate the economy, which has fueled growth and inflation bets but reduced the attractiveness of bonds’ fixed income payments, especially on a real rate basis. Additionally, bond prices have recently pushed yields on benchmark 10-year Treasury notes above 1.7% for the first time since January 2020.

The spread, or extra yield investors demand to hold high-rate corporate bonds over Treasuries, hit 1 percentage point earlier this month, its highest level since December, but slightly up from 0.88 percentage point in mid-February. While the gap has since narrowed, it has raised concerns that the selling pressure in Treasuries could tighten financial conditions and disrupt steady corporate borrowing.

“The time to chase yield is when spreads are very wide,” David Kotok, chief investment officer at Cumberland Advisors, told the WSJ. “When there is no prevalent fear of default, and spreads are very tight, that you only get a few basis points by sacrificing credit quality, history shows that is a bad trade.”

For more news, information, and strategy, visit the Equity ETF Channel.