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Bond Buyers Purge Government Debt for Corporate Debt

This article was originally published on ETFTrends.com.

As the bull market continues its forward momentum, the appetite for risk is following close behind as bond buyers are purging government debt for higher yields in corporate bonds of investment-grade quality. Despite Treasury yields nudging higher today, "bond buyers also sold their holdings of long-dated government paper to make room for an influx of corporate debt, accelerating this week’s yield climb," per a report from MarketWatch.

“Rising Treasury yields also reflect competition from a robust corporate bond new issue market,” said Jody Lurie, a corporate credit analyst at Janney Montgomery Scott.

Furthermore, there has been an influx of fixed-income investor capital into investment-grade corporate bond issues, according to Bank of America Merrill Lynch. An inflow of $120 billion into investment-trade corporate debt is on track to beat the $135 billion sold in the same month a year ago.

"Rising sovereign and non-financial corporate leverage is a global phenomenon. Debt levels of non-financial corporates have risen above the pre-crisis levels after a period of decline," Blackrock noted in a recent research report. "And smaller financial sector balance sheets have reduced liquidity in credit markets."

"The silver lining: Lower interest rates make the cost of servicing this debt much cheaper than a decade ago, and maturities have been lengthened, providing resilience to rising rates," the report added.

Related: 5 Fixed-Income ETFs that ‘Billions’ Character Bobby Axelrod Would Play

Investment-Grade Corporate Bond ETF Options

As opposed to investing in the bond themselves, investors can look for similar exposure within investment-grade corporate bond ETF options like the  iShares 1-3 Year Credit Bond ETF (CSJ) ,  ProShares Investment Grade—Intr Rt Hdgd (IGHG) and the  Xtrackers Inv Grd Bd Intst Rt Hdg ETF (IGIH) . All three reduce credit risk exposed to investors with debt holdings in investment-grade paper.

CSJ tracks the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index where 90 percent of its assets will be allocated towards a mix of investment-grade corporate debt and sovereign, supranational, local authority, and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to three years–this shorter duration is beneficial during recessionary environments.

IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index with long positions in investment grade corporate bonds issued by both U.S. and foreign domiciled companies. This is particularly important during market downturns when the propensity for a company to default on its debt is higher. As such, IGHG focuses on investment-grade issues to reduce credit risk.

IGIH seeks investment results that track the performance of the Solactive Investment Grade Bond – Interest Rate Hedged Index where a portion IGIH’s total assets will reside in long positions in U.S. dollar-denominated investment-grade corporate bonds. As in the case of IGHG, this strategy effectively eliminates exposure to riskier bonds with fund allocations in investment-grade issues.

For more trends in fixed income, visit the Fixed Income Channel.