Broadly speaking, 2021 will go down as a trying year on the domestic fixed income front, and next year could bring more of the same if the Federal Reserve proceeds with boosting interest rates multiple times.
However, the new year could bring opportunities with international bonds, potentially putting exchange traded funds like the Invesco International Corporate Bond ETF (PICB) in the spotlight.
“While the current outlook suggests continued outperformance by the U.S. bond market, we are watching for a change in fundamentals as an opportunity for global bonds potentially to become more attractive. One of those fundamentals is a change in the direction of the dollar. The tables could turn if the dollar weakens in 2022,” notes Christina Shaffer of Charles Schwab.
If the U.S. current account deficit balloons in 2022, which is possible given the ramping up of government spending, the dollar could decline, potentially providing some support for PICB along the way.
The $125.3 million PICB debuted in June 2010 and follows the S&P International Corporate Bond Index. Dollar price action is relevant to PICB investors because “…The Index measures the performance of investment-grade corporate bonds issued in the following currencies of Group of Ten (G10) countries, excluding the US dollar (USD): Australian dollar (AUD), British pound (GBP), Canadian dollar (CAD), euro (EUR), Japanese yen (JPY), Swiss franc (SFR), New Zealand dollar (NZD), Norwegian krone (NOK) and Swedish krona (SEK),” according to Invesco.
PICB has a modified duration of 7.2 years. Investors considering the Invesco ETF in 2022 should monitor ebbing yield differential.
“As for the yield differential, the use of lockdowns to combat COVID-19 in foreign developed economies should fade with time, presenting an opportunity for developed-market growth to catch up with the U.S.,” adds Shaffer. “We are monitoring this closely as it should flow through to higher global yields, narrowing the gap between the U.S. and DM markets. When the spread between U.S. yields and DM yields declines and/or the dollar weakens, global bonds should be more attractive.”
PICB allocates 56.5% of its weight to British, French, and Canadian debt. Credit risk is minimal in the ETF, as 45% of its 607 holdings are rated AAA, AA, or A, according to issuer data.
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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.