ETF Investors Are Still Hungry For Corporate Bonds

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Interest rates experienced a volatile first quarter that included the CBOE 10 Year Treasury Note Yield (TNX) trading as low as 1.65 percent and as high as 2.25 percent. Much of this bifurcated price action can be tied to economists and market watchers' uncertainty over the timing of a Federal Reserve rate hike. Nevertheless, this volatility did not stop ETF investors from pouring into corporate bonds at a breakneck pace over the last three months. The two largest corporate bond ETFs – the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and iShares iBoxx $ High Yield Corporate Bond ETF (HYG) experienced over $4.8 billion in combined inflows since the beginning of the year. LQD has now amassed a considerable $22 billion in total assets, while HYG harbors $16.7 billion. A look at a chart below shows just how confident fixed-income investors have become in the low volatility and steady price trend of investment grade corporate bonds. (chart) LQD notched a total return of 2.48 percent in the first quarter with dividends included. This significantly bested the iShares Core U.S. Aggregate Bond ETF (AGG) return of 1.52 percent. AGG invests in a broad mix of treasury, corporate, mortgage, and agency securities. The healthy capital appreciation in LQD has now pushed the 30-day SEC yield on this exchange traded fund down to just 3.02 percent. Rather than be concerned about interest rate risk, investors in this ETF are betting that rates remain stable for an extended period of time alongside corporate credit fundamentals. The concomitant rush to own higher yielding junk bonds associated with HYG certainly underscore the outlook for corporate credit has stabilized after a brief scare in December. HYG carries a fund rating score by Standard & Poors of B-f, which is meant to gauge the credit quality of the underlying holdings. High yields bonds are known to be more sensitive to stock market fluctuations rather than focusing heavily on interest rates. HYG sports a 30-day SEC yield of 5.23 percent, which is approximately 42 percent higher than LQD as recompense for the higher credit risk. In the first three months of the year, this high yield benchmark gained 1.97 percent in total return.
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Posted In: Sector ETFsETFs
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