The federal government backstopping U.S. corporate debt during the height of the pandemic gave the bond markets a nice boost, and some hedge funds are expecting that the party isn’t over just yet. Some funds are doubling down on corporate bonds, particularly of the riskier, longer duration variety.

“Lower-rated, long-duration U.S. investment-grade bonds may gain as much as 30% if spreads narrow to pre-Covid levels, according to hedge fund manager Alp Ercil, who has made double-digit returns from the strategy this year,” a Bloomberg article said. “While the extra yield over risk-free rates that investors demand for holding A-rated U.S. corporate debt has shrunk significantly in recent months, the same has yet to happen for long-duration BBB or BBB- rated paper, Ercil, the founder of Asia Research & Capital Management Ltd., told the 2020 Sohn Hong Kong investment conference on Wednesday.”

“The Covid-19 pandemic triggered a rout across asset markets in March, including indiscriminate dumping of investment-grade debt,” the article added. “Unprecedented stimulus by central banks to shore up their economies has since driven the compression of some spreads, as investors chase yield amid low and negative interest rates.”

For fixed income investors who 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 opt for an active 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.

IG Chart

IG data by YCharts

Key features of IG:

  • 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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