High-grade corporate bond exchange traded funds were slammed earlier this year as interest rates climbed amid speculation the Federal Reserve was close to tapering its quantitative easing program.
The Fed’s tapering timeout would not only serve to steady popular ETFs such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the shorter maturity iShares 1-3 Year Credit Bond ETF (CSJ), but delayed tapering also prompted borrowers to tap credit markets while rates are still favorable. [Investment-Grade Corporate Bond ETFs Stung as Rates Climb]
For a second consecutive year, U.S. corporate bond ETF issuance has reached a record. As of Dec. 6, U.S. companies had sold $438 billion in corporate debt, with Apple (AAPL) and Verizon (VZ) combining for $66 billion of that total, according to Barron’s.
With some market participants believing tapering will be delayed until March 2014 at the earliest, borrowers have tapped the high-grade and junk credit markets in significant fashion, helping steady the corresponding ETFs along the way. In the past 90 days, LQD and CSJ are up 3.6% and 1.1%, respectively.
In November, junk bond defaults fell to 2.4% from 2.5% in October and well below the long-term average of 3.1%. That helped lift the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond ETF (JNK) , the two largest U.S. high-yield bond ETFs. [Junk Bond ETFs Rise, Defaults Drop in November]
Global corporate bond ETFs, which are less sensitive to changes in U.S. interest rates, have also excelled. The PowerShares International Corporate Bond Portfolio (PICB) is higher by 5.7% in the past 90 days. PICB is an investment-grade with 95% of its weight allocated to issues rate AA, A or BBB.
One of the better corporate bond ETFs over the past three months has been the Market Vectors International High Yield Bond ETF (IHY) . With European banks proving reluctant to lend non-investment grade borrowers, issuance of junk bonds on the continent has nearly doubled to $76 billion this year, helping IHY gain almost 6% in the past 90 days.
Four of IHY’s top-six country holdings are European nations with the U.K., Germany and Italy combining for just over 30% of the ETF’s weight. Over 46% of the ETF’s 370 issues are denominated either in British pounds or euros. [Global Junk Bond ETF Soars]
iShares iBoxx $ Investment Grade Corporate Bond ETF
Tom Lydon’s clients own shares of HYG, JNK and LQD.
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.