Investors Heading for the Exits When It Comes to Junk Bonds

The extended bull market elicited a risk-on sentiment that helped fuel fixed income investors’ appetites for high-yielding assets, but the coronavirus outbreak is now making them think twice. It seems investors are now heading for the exits when it comes to junk bonds as these debt-laden companies face tenuous financial positions, especially if the coronavirus outbreak is the first sign of a global recession.

Per a Wall Street Journal report, “the specter of widespread corporate defaults in the coming months has caused a massive selloff in junk bonds around the world, as many debt-laden companies face the prospect of going weeks or months with virtually no revenue. Bonds without investment-grade ratings plunged at their fastest pace in history in March, money managers said, stunning investors and hitting levels that portend a deep recession with scores of company failures.”

Some high-risk companies include airlines, hotel operators, gaming companies, and restaurant chains that have been affected by closures due to the outbreak.

“This is kind of your worst nightmare,” said Raymond Kennedy, a high-yield bond portfolio manager at Los Angeles investment firm Hotchkis & Wiley. “The question is who can survive for how long.”

Investors can still get exposure to corporate bonds, especially since the Fed is on an aggressive bond-buying spree to help shore up the markets. As such, here are some investment grade options if high yield is too much risk to bear:

ProShares Investment Grade—Intr Rt Hdgd (BATS: IGHG): IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index with long positions in investment grade corporate bonds issued by both U.S. and foreign domiciled companies. This is particularly important during market downturns when the propensity for a company to default on its debt is higher. As such, IGHG focuses on investment-grade issues to reduce credit risk.

Xtrackers Inv Grd Bd Intst Rt Hdg ETF (BATS: IGIH): IGIH seeks investment results that track the performance of the Solactive Investment Grade Bond – Interest Rate Hedged Index where a portion IGIH’s total assets will reside in long positions in U.S. dollar-denominated investment-grade corporate bonds. As in the case of IGHG, this strategy effectively eliminates exposure to riskier bonds with fund allocations in investment-grade issues.

iShares iBoxx $ Invmt Grade Corp Bd ETF (NYSEArca: LQD): LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk.


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