With global yields at basement lows, investors around the world have been flocking to U.S. corporate bonds to provide them with the yield they’re after. Market experts are predicting only modest gains in the stock market in 2020, which could fuel the appetite for corporate bonds even more—to date, global investors have purchased $114 billion of bonds in 2019 through the third quarter, according to Federal Reserve flow of funds data.
“There’s simply not enough high-quality income-producing assets to meet the demand,” Mark Kiesel, chief investment officer of global credit at Pacific Investment Management Co., said in an interview. “That’s the reason that credit did so well this year. It wasn’t just the fact that the Fed and other central banks cut rates. The fact is that there’s just that much demand.”
“Global central banks have cut interest rates roughly 90 times over the past year, the largest cumulative easing since the financial crisis, according to Canadian Imperial Bank of Commerce data,” a Bloomberg report noted. “While the Fed accounted for three of those, taking its policy rate down to a range of 1.5% to 1.75%, that’s still higher than much of the rest of the developed world, including Japan and Europe, where rates are near or even below zero.”
“It’s very hard for the average foreign investor to survive — we’re still at a point now where it’s max desperation,” said Hans Mikkelsen, head of high-grade credit strategy at Bank of America Corp. “Basically there’s only one game in town for foreign investors, and that’s the U.S. corporate bond market.”
“The average U.S. investment-grade corporate bond yields 2.87%, or about 1 percentage point more than Treasuries,” the Bloomberg report noted.
Corporate Bond ETF Options
Investment-grade corporate bond-focused fixed-income ETF options include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU), iShares iBoxx $ Investment Grade Corp Bond ETF (NYSEArca: LQD) and Vanguard Interm-Term Corp Bond ETF (NASDAQ: VCIT).
CIU tracks the investment results of the Bloomberg Barclays U.S. Intermediate Credit Bond Index. CIU focuses on investment-grade corporate debt and sovereign, supranational, local authority and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to ten years.
LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk.
VCIT seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity, namely the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. While VCIT holds debt issues with maturities between 5 and 10 years, they are all investment-grade holdings to minimize default risk.
For more trends in fixed income, visit the Fixed Income Channel.