Investment-Grade Bond ETFs Attracting More Interest as Risks Abate

Investment-grade corporate debt exchange traded funds are attracting more investor interest as the economic recovery has helped diminish the general credit risk outlook.

For example, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) was among the most popular ETF plays over the past week, bringing in $1.1 billion in net inflows, according to ETFdb data.

According to Bank of America data, credit rating agencies S&P Global, Moody’s, and Fitch have upgraded $361 billion of higher-rated, investment grade bonds in the past two months, including a record $184 billion in June, the Financial Times reports.

“It’s like something that I have not seen in my time [in the industry],” Michael Anderson, a credit strategist at Citigroup, told FT. “After the financial crisis we didn’t get major companies moving back to investment grade so quickly.”

The hundreds of billions of dollars of US corporate debt upgrades showcased a partial reversal of the downgrades at the start of the coronavirus pandemic, reflecting the strong rebound in profitability across corporate America. It also showed the liquidity available and low borrowing costs for many companies, which have been supported by the accommodative monetary policy from the Federal Reserve.

“I don’t think you could have anticipated the vaccine, the economic growth, and the strong availability of really low-rated debt,” Christina Padgett, senior vice-president of Moody’s Corporate Finance Group, told FT.

“None of us felt like in March, April, May [last year]that the market was going to come roaring back,” Padgett added, “and all these weakly positioned companies were suddenly going to have all the debt that they needed and then some.”

Ratings agencies were quick to downgrade their assessments on a broad range of corporate debt at the outset of the pandemic. Ratings on some $1 trillion out of about $7.6 trillion of US investment grade corporate debt were cut over March and April of 2020, according to BofA data.

“The wave of downgrades was probably too severe,” Yuri Seliger, a credit strategist at Bank of America, told FT.

For more information on the fixed-income market, visit our bond ETFs category.