The recent news that the Federal Reserve will purchase investment-grade corporate debt using ETFs appears to have put a floor under the market, providing some support for ETFs such as 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.
While the Fed embracing corporate bonds is helpful, there are reasons to consider higher grade corporates and SKOR as 2020 moves forward.
“Investment-grade corporations have rushed to boost their liquidity through the issuance of longer-term fixed-rate corporate bonds,” said Moody’s Chief Economist John Lonski in a note out Thursday. “The funds obtained from March’s investment-grade corporate bond issues either directly added to cash or refinanced outstanding debt. The latter helped to reduce the risk that a future tightening of credit markets might prevent the refinancing of near-term maturities, especially the refinancing of commercial paper and bank loans.”
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.”
Further supporting the case for investment-grade corporates is the fact that the global economy, though sputtering, is on firmer ground today than it was during the global financial crisis.
“March 2020’s issuance of IG bonds by U.S. corporations soared higher by 153% from March 2019,” said Lonski. “In stark contrast, September-October 2008’s intensification of the financial crisis brought on by Lehman’s collapse showed a 72% year-over-year plunge by such issuance to a monthly average pace of only $23.2 billion.”
Data confirm that although the first quarter was full of coronavirus challenges, companies weren’t shy about tapping debt markets.
“First-quarter 2020’s issuance of investment-grade bonds from U.S. companies increased by 52.4% yearly to a record $433.7 billion. The former calendar-quarter record for IG bond offerings from U.S. companies was the $320 billion of 2017’s first quarter,” according to Moody’s.
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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.