If gold’s rally is evident of anything, it’s that investors are still wary of the uncertainty that the coronavirus pandemic might bring moving forward. As such, this could inject a heavy load of volatility into the corporate bond space, which might keep risk averse investors away.
“Bond investors are wary about a return of coronavirus-induced volatility, despite central banks’ efforts to backstop credit markets,” a Wall street Journal report said. “This fear is keeping yields on investment-grade corporate bonds elevated compared with the cost of insuring them against defaults in derivatives markets. That is because the indexes of corporate debt derivatives have proven to be easier to trade than cash bonds since the market meltdown in March.”
“The difference means investors right now could buy insurance out of the income from their bonds and still have money left over,” the report added. “This would make them long cash bonds and short the same credit through the derivatives markets, hedging their risk while still earning some yield from their bonds.”
Nonetheless, for fixed income investors who want to play the long end of the yield curve when it comes to corporate bonds can look at exchange traded funds (ETFs) 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. (“Moody’s”) or, if unrated, of comparable quality in the opinion of those selecting such investments.
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
For more market trends, visit ETF Trends.