Investment-grade bond exchange traded funds have experienced a pullback as investors anticipate Fed “tapering” and rising rising rates, but this may only be the beginning.
“Interest rates simply rose too fast, and for now we think the rotation out of bond funds will contribute more spread widening,” Back of America analysts led by Hans Mikkelsen said in a report. If yields continue to rise, “we could see massive outflows from high-grade bond funds and a much more disorderly rotation with significantly wider credit spreads. This scenario remains clearly the biggest risk to high grade this year.”
According to Bank of America Merrill Lynch, investment-grade debt has declined over 6% since May 2, reversing a year’s worth of returns, reports Charles Mead for Bloomberg. [Investors Selling Bond ETFs as Rates Rise]
The 10-year Treasury yield was at 2.59% Tuesday, compared to the record-low 1.379% on July 25, 2012. The five-year average yield is 2.75%.
Bank of America strategies, though, are still “long-term bullish on credit and remain strategically overweight.” They also recommend buying credit-default swap protection “until we get comfortable with the coming acceleration of outflows. The recent sell-off and any further weakness only work to make for more attractive entry points from the perspective of long-term, patient, investors.”
Currently, there are no credit default swap ETFs available on the U.S.-listed markets, but ProShares is working on a suit of CDS related funds. [Because You Need a CDS ETF]
Investment-grade debt related ETFs include:
- iShares Barclays 7-10 Year Treasury Bond Fund (IEF) : down 4.7% year-to-date
- iShares Barclays 20 Year Treasury Bond Fund (TLT) : down 9.2 year-to-date
- iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) : down 6.4 year-to-date
- iShares Barclays Credit Bond Fund (CFT) : down 5.0 year-to-date
For more information on debt securities, visit our bond ETFs category.
Max Chen contributed to this article.
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.