Start Playing to Win When it Comes to the Bond Market

A lot of uncertainty remains in the capital markets, which is eliciting a risk-off sentiment, but as the effects of the coronavirus start to wane, is that the time when investors should flip the risk switch back on? Some market experts feel it’s time to dial up the risk now and play to win, especially when it comes to the bond markets.

“Beyond the mechanical impact of asset price moves, we are assessing the potential structural changes the outbreak might bring on in the years ahead — and the implications on the fundamentals of asset classes. Think of the reorganization of global supply chains that had started before the pandemic amid heightened trade tensions, with their potential impact on corporate profits and inflation,” said Vivek Paul, senior portfolio strategist at BlackRock Investment Institute in a blog post.

“If bond yields are near effective lower bounds, their ability to act as portfolio ballasts during risk-off events is less than in the past. This was evident when lower-yielding euro area and Japanese bonds provided less ballast than U.S. Treasurys in the recent equity selloff,” Paul added.

Start Playing to Win When it Comes to the Bond Market 1

So does this mean investors should start snatching up the riskiest growth-oriented equities? Not necessarily so—Paul says credit exposure should be top-of-mind for investors right now.

“Over the next six to 12 months, we favor credit over equities given bondholders’ preferential claim on corporate cash flows and prefer an up-in-quality stance in equities,” he writes.

High Yield Bond ETF Options

Investors looking to add high yield bond exposure to their ETF portfolios can look at the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK). Some market experts question whether this move is nothing more than a small bandage on a gunshot wound.

Investors contemplating a high yield option can take a look at the Goldman Sachs Access High Yield Corporate Bond ETF (GHYB). GHYB seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the FTSE Goldman Sachs High Yield 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 high yield corporate bonds denominated in U.S. dollars that meet certain liquidity and fundamental screening criteria.

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