All About the Fed With Corporate Bond ETFs | ETF Trends

Easily one of the biggest stories from the bond market this year is the Federal Reserve, prompted by the coronavirus pandemic, moving to shore up various assets, including investment-grade corporate debt.

That’s relevant for numerous ETFs, including the FlexShares Credit‐Scored US Corporate Bond Index Fund (NasdaqGM: SKOR).

SKOR tracks the Northern Trust Credit-Scored US Corporate Bond Index, which focuses on issues from companies with quality characteristics such as strength in management efficiency, profitability, and solvency, according to FlexShares.

“In March 2020, the issuance of US$-denominated investment-grade corporate bonds soared to a record $268 billion, which far surpassed January 2017’s erstwhile zenith of $193 billion,” said Moody’s Investors Service in a note out Thursday. “Incredibly enough, despite how April 2020 will be the worst month for U.S. business activity since the Great Depression, April’s issuance of US$-denominated IG corporate bonds is likely to set a new high. As of April 29, such IG bond offerings had already reached $252.5 billion for the month. April 30’s heavy schedule of new IG bonds supports expectations of a new zenith.”

Keeping SKOR

The model that serves as a backstop for SKOR “also addresses potential corporate bond liquidity challenges by optimizing a carefully selected subset of all credit issuers from which illiquid, orphaned and small lot names have been removed,” said FlexShares. “Then, multiple factors are taken into account including the characteristics of issuers’ total debt structure, minimum exposure percentages, and odd-lot trade restrictions, to aid in developing our corporate bond indexes.”

“The issuance of US$-denominated IG corporate bonds has received support from special purpose vehicles sponsored by the Federal Reserve,” according to Moody’s. “The Fed’s backstop credit facilities may facilitate the recently announced issuance of up to $25 billion of investment-grade bonds by a major aerospace manufacturer for the purpose of assuring sufficient liquidity during a very difficult period for commercial aerospace.”

Data confirm the “Fed backstop” is important to the investment-grade corporate bond market.

“The Fed’s unprecedented creation of a backstop for U.S. investment-grade corporate bonds helped to prompt a substantial lowering of investment-grade bond yields and spreads from their March highs,” said Moody’s. “After peaking at March 20’s 4.58%, Bloomberg/Barclays US$-denominated investment-grade corporate bond yield has since declined to April 29’s 2.69%, where the latter is less than each of its month-long averages starting with May 2013 and ending with January 2020. By contrast, the month-long average of this IG corporate bond peaked at November 2008’s 8.60%, which exceeded each of its preceding month-long averages back to December 1994’s 8.65%.”

For more on multi-asset strategies, please visit our Multi-Asset Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.