While the rest of the world is seeing yields dip into negative territory, U.S. corporate bond exchange traded funds could find support from foreign investors seeking more attractive yields in the U.S.
Various estimates of sovereign debt in the no yield category put the total in excess of $15 trillion, with numbers quickly rising in recent years while central banks drive interest rates to zero and below, CNBC reports.
Negative-yielding corporate debt is a quickly growing segment as well, expanding from just $20 billion in January to the $1 trillion level more recently, according to Jim Bianco, founder of Bianco Research.
“The interest rate risk that these bonds carry is huge,” Bianco told CNBC. “The financial system doesn’t work with negative rates. If the economy recovers, the losses that investors would take are unlike anything they’ve ever seen.”
German is the most prominent example of a negative rate environment, with yields on all along the curve trading below zero. Bianco said that the negative-yield trend was due to entities like the European Central Bank pumping more money into the financial system to support growth in the Eurozone.
“They’ve so flooded their financial system with money that there’s not enough alternatives,” Bianco said. “That’s why you have people paying such astronomical prices that you wind up with negative yields.”
Hans Mikkelsen, credit strategist at Bank of America Merrill Lynch, argued that there could be opportunities in the front and back ends of the yield curve in the U.S. Specifically, he advised investors who are worried about a recession to take on U.S. investment grade debt with short duration while more confidence investors should look at longer-term instruments.
Corporate Bond ETF Plays
In the U.S., credit quality remains healthy, despite the influx of new corporate bonds into the market.
Fixed-income investors who are interested in short-term corporate bonds can look to something like the Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH), iShares Short-Term Corporate Bond ETF (NasdaqGM: IGSB) and SPDR Portfolio Short Term Corp Bond ETF (NYSEArca: SPSB).
To access investment-grade corporate bonds on the other end of the yield curve, investors can look to the iShares 10+ Year Investment Grade Corporate Bond ETF (LLQD), Vanguard Long-Term Corporate Bond ETF (VCLT) and SPDR Portfolio Long Term Corporate Bond ETF (SPLB).
For more information on the fixed-income space, visit our bond ETFs category.