Bet on Investment Grade Bond ETFs Amid Rising Corporate Default
As the Fed continues to hike interest rates to curb inflation, the corporate bond market is experiencing an increase in default rates. This rise in defaults signifies the challenges that U.S. companies face amid higher borrowing costs and economic uncertainties.
With 41 defaults in the U.S. (more than double the same period last year) and one in Canada so far this year, according to Moody's Investors Service (quoted on CNBC), it is evident that the landscape for corporate bond investing has become more complex.
Investors should note that that defaults often follow financial distress. Companies resort to multiple measures to strengthen their balance sheets before defaults happen.
High Interest Rates
The reason behind the financial distress faced by companies is higher interest rates caused by the steep Fed rate hikes since March 2022. The cost of debt financing has jumped from an average of 4% to 6% over the last 15 years to a range of 9% to 13% currently, per the CNBC article. Higher rates made debt pricier for companies. Those who are in acute need of liquidity or loaded with huge debt find the situation extremely troublesome.
Rising Default Rates and Industry-Specific Risks
The recent surge in defaults has been triggered by several factors, including industry-specific risks and the result of the pandemic. While high interest rates acted as a key headwind, other issues have also contributed to the challenges faced by companies.
For instance, Envision Healthcare, with over $7 billion in debt, filed for bankruptcy due to healthcare-related issues arising out of the pandemic. Bed Bath & Beyond fought a lot due to its large base physical stores while consumers increasingly moved to online shopping. Diamond Sports struggled as customers increasingly chose to avoid cable TV packages, hurting regional sports networks.
Should You Go For Investment Grade Corporate Bonds?
Investment-grade corporate bonds refer to bonds issued by companies that have a higher credit rating, meaning a lower risk of default. These bonds are considered less risky compared to junk or higher-yielding bonds. Investment grade corporate bonds often yield higher than Treasuries.
Investment-grade bonds are normally assigned credit ratings of BBB- or higher by major credit rating agencies like Standard & Poor's, Moody's, or Fitch. These ratings reflect the agencies' assessment of the issuer's ability to meet its debt obligations. With defaults rising in America, it is better to bet on debt of financially sound companies.
iShares IBoxx $ Investment Grade Corporate Bond ETF LQD charges 14 bps in fees and yields 3.69% annually.
FlexShares Credit-Scored US Long Corporate Bond ETF LKOR charges 22 bps in fees and yields 4.81% annually.
SPDR Portfolio Long Term Corporate Bond ETF SPLB charges 4 bps in fees and yields 4.52% annually.
iShares 10+ Year Investment Grade Corporate Bond ETF IGLB charges 4 bps in fees and yields 4.49% annually.
iShares Interest Rate Hedged Long-Term Corporate Bond ETF IGBH charges 14 bps in fees and yields 5.69% annually.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD): ETF Research Reports
SPDR Portfolio Long Term Corporate Bond ETF (SPLB): ETF Research Reports
FlexShares Credit-Scored US Long Corporate Bond ETF (LKOR): ETF Research Reports
iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB): ETF Research Reports
iShares Interest Rate Hedged Long-Term Corporate Bond ETF (IGBH): ETF Research Reports
