Investment-grade corporate bond exchange-traded funds (‘ETFs’) have quietly come back in popularity in 2017 so far. The sector, in the USA anyway, has enjoyed strong inflows just as the hapless experts and analysts had largely written them off.
The corporate bond sector, given that it exposes investors to corporate credit risk, does tend to enjoy an implied improvement as stock markets rise. The increased value of companies, fed into default risk models, especially at a time when stock market volatility is surprisingly low, results in lower implied default probabilities and consequently lower ‘fair’ credit spreads.
This is of course especially the case for the lower end of the credit spectrum where the fair credit spread is quite highly geared to the stock price and its volatility.
Investment-grade bonds, which carry high credit ratings, underperformed their lower-rated, high-yield equivalents in 2016, with the divergence particularly acute after the November election of Donald Trump, whose policies are seen as better for the equity market and consequently for riskier assets.
Investment-grade bonds are issued by companies that no matter how remote the risk is, could default on payments. They don’t have the government backing that U.S. Treasuries carry. Still, many high-rated company bonds are considered relatively low risk, as are government bonds. November was the worst month for Treasuries since December 2009.
That trend has continued thus far in 2017, with all three investment-grade bond ETFs up about 0.3%. By way of comparison, the iShares high-yield bond fund is up 1.2%. The PIMCO 0-5 Year High Yield Corporate Bond Index ETF is up 1% on the year.
To learn more about credit spreads and corporate bonds please see our detailed and popular modules on the topic.
Recent performance of High Yield Bonds
Recent performance of Long Duration US Treasuries
For an introduction to corporate bonds, check out our course here: http://www.sovereignleadership.com/training/fundamental/corporate-bonds-intro
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