Bond Investors Are Expecting More Help from the Fed

The Federal Reserve did its part to shore up the bond market by stepping in to purchase exchange-traded funds (ETFs) and later, individual bonds, but are they back for more like an all-you-can-eat buffet? Bond investors are certainly hoping so.

“The Federal Reserve has proven it knows how to keep credit flowing during a crisis,” a MarketWatch report noted. “Look at the record debt already issued this year by highly rated and speculative-grade U.S. corporations during the pandemic.”

“But bond investors now also expect the Fed’s unprecedented stimulus sloshing around financial markets to turn the tide on the credit cycle, namely by preventing more companies from going belly up than was expected only a few months ago,” the article added.

The big uncertainty remains the coronavirus pandemic and whether companies can stay afloat as a second wave of cases is preventing companies from returning to normal. Access to fresh capital will be key for these companies’ survival.

“It’s a key axiom that businesses don’t default because they are losing money,” said Steven Oh, global head of credit and fixed-income leverage at PineBridge Investments in Los Angeles, via the MarketWatch report. “Businesses default because their access to liquidity dries up.”

Getting Core Bond Exposure

ETF investors looking for core bond exposure can look to the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), which has been the go-to fund for investors.

Fund facts:

  • AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index.
  • The index measures the performance of the total U.S. investment-grade bond market.
  • The fund generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.

Reasons to use AGG:

  • Broad exposure to U.S. investment-grade bonds
  • A low-cost easy way to diversify a portfolio using fixed income
  •  Use at the core of your portfolio to seek stability and pursue income

An Additional Corporate Bond Alternative

Another ETF to consider is the Goldman Sachs Access Investment Grade Corporate Bond ETF (GIGB). GIGB seeks to provide investment results that closely correspond to the performance of the FTSE Goldman Sachs Investment Grade Corporate Bond Index.

The fund seeks to achieve its investment objective by investing at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index. The index is a rules-based index that is designed to measure the performance of investment grade, corporate bonds denominated in U.S. dollars that meet certain liquidity and fundamental screening criteria.

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