Must-know: Analysis of market activity in corporate bonds

Market Realist

Corporate investment-grade bonds for the week ending August 22 (Part 1 of 6)

What are investment-grade bonds?

Investment-grade corporate bonds are  issued by borrowers with a high ability to make timely payments on their debt. The bonds are rated BBB- and above, according to Standard & Poor’s ratings system. A higher rating implies lower credit or default risk. A lower rating implies the opposite. The S&P 500 Index (IVV) (SPY) components—Johnson & Johnson, Coca Cola, and ExxonMobil—are examples of corporate borrowers with an investment-grade rating.

Returns on investment-grade bonds

Investment-grade bonds have relatively lower credit risk compared to high-yield bonds. As a result, their yields are also lower. Yields are based on a spread over yields on U.S. Treasury securities of similar maturity. The spread is based on the issuer’s credit rating. A higher-rated borrower has a lower yield spread compared to a lower-rated issuer.

The iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) mainly invests in investment-grade bonds issued by U.S. corporate borrowers. The Vanguard Total Bond Market ETF (BND) and the iShares Core Total U.S. Bond Market ETF (AGG) mainly invest in investment-grade bonds issued by corporates and the U.S. Treasury.

This series will analyze key trends in investment-grade bonds’ primary and secondary markets in the week ending August 22. You’ll also read about the outlook for the asset class (Part 6).

Primary market for corporate bonds

Corporate borrowers issue debt in the primary capital market. The debt can be privately-placed to individuals or institutions. It’s usually marketed to investors through underwriters or investment banks—for example, JPMorgan (or JPM) or Goldman Sachs (or GS).

Importance of secondary market trends

The secondary market enables the securities to be sold. A liquid market for securities—one where securities can be sold easily and trading volumes are high—also proves to be more cost-effective for investors. By providing price data, the secondary market also gives you an indication of your investments’ value.

Read about primary market trends in the next part of the series.

Continue to Part 2

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