The Federal Reserve is no doubt doing its part to help support the economy by dumping trillions into businesses, which is helping to buoy the bond market. The capital markets are betting that even more action could be on the way, which should only help the bond markets even further.
Per a Bloomberg report, the Fed “has already unleashed a barrage of new policies to keep the economy out of depression. Investors reckon it’s lining up another one.”
The Fed is turning to Treasury yields that have been seeing historical lows as market analysts foresee a possibility of negative rates.
“The Fed’s version of the strategy known as yield-curve control is expected to involve capping yields on government bonds of a chosen maturity -– by buying however much it takes,” the report added. “For central banks that already cut short-term interest rates to zero, it’s a way to signal that they’ll stay low for an extended period while helping pin down longer-term borrowing costs too.”
“We do expect yield-curve control by year-end,” said Priya Misra, head of global rates strategy at TD Securities in New York. Fed Chairman Jerome Powell and his colleagues paint a bleak picture of the economy’s near-term prospects, and they’ll need a strategy to deal with that, she said. “They can’t keep a negative economic outlook without easing monetary policy further.”
For investors looking to get in on the corporate bond rally can look to investment grade options in exchange-traded funds (ETFs). ETFs in this category include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU), iShares iBoxx $ Investment Grade Corp Bd ETF (NYSEArca: LQD) and Vanguard Interm-Term Corp Bd ETF (NASDAQ: VCIT).
Another option is the ProShares Investment Grade—Intr Rt Hdgd (BATS: IGHG). IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index so it invests in long positions in USD-denominated investment-grade corporate bonds issued by both U.S. and foreign domiciled companies and short positions in U.S. Treasuries.
With the Federal Reserve stepping in to purchase corporate bonds to help keep the economy afloat, one 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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