Spreads Say Principal Corporate Bond Is Worth Considering | ETF Trends

Corporate bond yield spreads are subdued and that could pave the way for opportunity with the right exchange funds, including the Principal Investment Grade Corporate Active ETF (NYSEArca: IG).

IG is an actively managed fund, a potentially beneficial trait at a time when demographic shifts could disrupt traditional corporate bond investing. IG tries to provide current income and capital appreciation by investing in investment-grade corporate bonds rated BBB- or higher by S&P Global Ratings or Baa3 or higher by Moody’s Investors Service.

“Following the Great Recession, the average Baa3 EDF did not ease to 0.69% until August 5, 2009, or a little more than a month into the record long business-cycle upturn of July 2009 through February 2020. Perhaps, the median Baa3 EDF is again telling us that the COVID-19 recession has passed,” said Moody’s in a note out Thursday.

IG ETF Interest Sparked

IG combines bottom-up independent credit research with top-down strategy, seeking alpha through credit selection, industry rotation, and curve positioning and a forward looking, iterative process seeks credits exhibiting stable-to-improving credit rating trajectory which may benefit from spread compression and income premiums, an approach that’s relevant in today’s corporate credit climate.

As the Federal Reserve poured funds into the bond markets, particularly exchange-traded funds (ETFs) and individual bonds, it was corporate bonds that were the major beneficiary during the second quarter. A one-two combination of tighter credit spreads and the central bank keeping rates low allowed companies to refinance current debt at lower rates or take on more debt.

“As estimated by Moody’s Analytics, the median yield spread over U.S. Treasuries for 10-year Baa3-rated corporate bonds last peaked at the 450 bp of March 24, 2020,” according to Moody’s. “Helped by the Fed’s extraordinary support of investment-grade corporate bonds that was extended to companies incurring fallen angel downgrades after March 23, the median Baa3 spread has since narrowed to August 12’s 278 bp. In addition, the narrowing of the Baa3 spread was abetted by a less uncertain business outlook and ample systemic liquidity.”

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.

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