Bond Markets Show Signs of Nervousness Ahead of U.S. Election

Following the previous evening’s U.S. presidential debate, equities responded to the upside in Wednesday’s trading session with a 300-point jump in the Dow Jones Industrial Average. However, the bond markets were sending a nervous signal to the capital markets that there’s still a lot of uncertainty ahead of the election.

“Investors in Treasury markets showed signs of nervousness Tuesday ahead of the first debate between the candidates in this year’s U.S. presidential election,” a Wall Street Journal article added. “Yields fell on both 10-year U.S. government bonds and Treasury inflation-protected securities, known as TIPS. The difference between the two yields, called the break-even rate, shrank, indicating a fall in inflation expectations in markets.”

“That rate has been the most reliable predictor of equity-market moves this year, according to analysts and investors. When the rate falls, stocks tend to also fall,” the article added.

Bond Markets Show Signs of Nervousness Ahead of U.S. Election 1

In the meantime, ETF investors can still get a dose of bond exposure, especially if they want to play the long end of the yield curve when it comes to corporate bonds can look at ETF such as the FlexShares Credit‐Scored US Long Corporate Bond Index Fund (CBOE: LKOR). LKOR follows the Northern Trust Credit-Scored US Long Corporate Bond Index, which 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.

Additionally, investors can also opt for an actively-managed option like the Principal Investment Grade Corporate Active ETF (IG). IG seeks to provide current income and, as a secondary objective, capital appreciation.

The fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in investment grade corporate bonds and other fixed income securities at the time of purchase. “Investment grade” securities are rated BBB- or higher by S&P Global Ratings (“S&P Global”) or Baa3 or higher by Moody’s Investors Service, Inc. or, if unrated, of comparable quality in the opinion of those selecting such investments.

Key features of the IG fund:

  • Active management: Combines bottom-up independent credit research with top-down strategy, seeking alpha through credit selection, industry rotation, and curve positioning
  • A straight forward process: Investment grade exposure, free of derivatives, unrated issues, and large duration bets
  • A strategic perspective: Forward looking, iterative process seeks credits exhibiting stable-to-improving credit rating trajectory which may benefit from spread compression and income premiums

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