Not surprisingly, low interest rates are compelling corporate borrowers to refinance old bonds and issue new debt. New issuance isn’t a negative, but it does remind investors that quality is imperative in the corporate bond market.
The FlexShares Credit‐Scored US Corporate Bond Index Fund (NasdaqGM: SKOR) helps investors implement that factor at a time of surging corporate issuance.
Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy. When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means higher sensitivity to shifts in rates.
“Floodgates have opened in the corporate bond market as issuers capitalize on some of the cheapest funding costs of the year,” reports Bloomberg. “Bank of America Corp. strategists led by Hans Mikkelsen said in a report Friday. Investors expect spreads to tighten further in the next three months, but could widen over the longer-term, the strategists said, citing a November survey.”
Not The Run Of The Mill Corporate Bond ETF
SKOR is not the run of the mill corporate bond ETF. The ETF 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.
The corporate bond market, including investment-grade issues, has recently been under some duress amid rising concerns about the tenuous grasps on investment-grade ratings held by some issuers. By some estimates, about half the U.S. investment-grade corporate bond market is rated BBB, meaning those bonds are one to three levels from junk territory.
“Investment-grade spreads are hovering at 105 basis points over Treasuries, the lowest level since October 2018. High-yield premiums meanwhile came in 16 basis points last week alone and should rally further alongside rising stocks and oil prices,” according to Bloomberg.
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.”
For more information on the fixed-income space, visit our bond ETFs category.
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.