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UPDATE 1-Investment-grade credit ETF drops to nine-month low

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Kate Duguid
·2 min read
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(New throughout)

By Kate Duguid

NEW YORK, Feb 25 (Reuters) - A major investment-grade credit ETF hit its lowest since May 2020 on Thursday as investors bet on higher inflation, which could erode future returns.

BlackRock's iShares iBoxx Investment Grade Corporate Bond ETF - among the largest investment grade credit funds - fell to a nine-month low of $131.06 and was last trading down 0.99% to $129.78. Since the start of the year, the LQD fund has lost more than 5% this year.

The move in LQD is being driven by the rise in U.S. Treasury yields, which on Thursday rose to new milestone highs as the week's selloff in bonds continued. The benchmark 10-year yield was last up 14.1 basis points at 1.534%, and rose as far as 1.614%, the highest in a year.

The growing likelihood that Congress will pass President Joe Biden's $1.9 trillion stimulus plan has stoked fears about a possible spike in inflation. As those expectations have risen, so has the popularity of the so-called reflation trade, which this month has pushed Treasury yields up dramatically.

"It is all the Treasury move - that's what's driving price movement. Spreads have been fairly stable - we've been getting a basis point here and there - so the movement has really been in the Treasury market. Specifically with LQD, it's down as much as the 10-year is in price - it's all the Treasury move," said Monica Erickson, investment grade credit portfolio manager at DoubleLine Capital.

LQD was moving in step with the 10-year yield, said Andy Brenner, head of international fixed income at NatAlliance Securities, which was evident when the ETF plummeted at 1:00 pm ET on the disappointing results of the seven-year Treasury auction.

U.S. investment grade credit funds fell 0.55% in the last week due to market moves, according to Lipper Fund Flows data. BlackRock taxable bond funds, which also include high yield corporate debt, saw $847 million in outflows in the last week, also according to Lipper. (Reporting by Kate Duguid; Editing by Chizu Nomiyama)