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Bond ETFs to Capitalize on Loose Global Central Bank Policies

Investment-grade corporate bond exchange traded funds may still have legs as global central banks continue to combat stubbornly low inflation expectations and extend stimulus measures.

“The ECB and Bank of England (BOE) both started buying non-financial corporate bonds this year, driving down corporate credit spreads globally,” BlackRock strategists, led by Richard Turnill, said in a research note. “We see more spread compression ahead, based on our expectations for the ECB to extend its asset purchases.”

The BlackRock strategists are narrowing yield spread between corporate bonds and their respective government counterparts. With central banks implementing loose monetary policies, government bond yields have declined. Additionally, as central banks start hoarding corporate bonds, credit yields have also declined, alongside government bond yields.

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Looking ahead, BlackRock expects low Eurozone inflation expectations to allow the ECB to extend its stimulus measures beyond March 2017, which could further support the credit market.

“Further ECB monetary easing measures could come as early as this week,” the BlackRock strategists said. “We see an extension of the March end point for the ECB’s QE program as more likely than an increase in the size of monthly purchases or a lowering of interest rates below the current -0.40% deposit rate.”

Consequently, the increased support from the central bank could further bolster corporate debt around the globe as income-starved investors squeeze out yields from anywhere they can.

For ETF investors interested in U.S. corporate bond exposure, there are a number of options available. For instance, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) has a 8.59 year duration and a 2.87% 30-day SEC yield, Vanguard Intermediate-Term Corporate Bond ETF (VCIT) has a 6.5 year duration and a 2.75% 30-day SEC yield, and SPDR Barclays Intermediate Term Corporate Bond ETF (ITR) has a 4.41 year duration and a 2.16% 30-day SEC yield.

Given the increased buying pressure, Eurozone bond yields could fall even further and prices rise. While there are no Europe-focused speculative-grade debt ETFs on the market, U.S. investors can still gain exposure to European markets through international investment-grade bond ETFs with heavy tilts toward these countries.

For example, the PowerShares International Corporate Bond Portfolio (PICB) holds 23.2% U.K., 19.2% France, 9.2% Germany, 6.5% Italy, 6.0% Netherlands, 4.8% Spain, 3.7% Switzerland and 2.5% Sweden. PICB has a 6.81 year duration and a 0.74% 30-day SEC yield.

The SPDR Barclays International Corporate Bond ETF (IBND) includes 14.3% France, 13.1% U.K., 10.3% Germany, 7.8% Netherlands, 7.0% Italy, 5.1% Spain, 5.0% Switzerland, 2.7% Sweden, 2.2% Belgium, 0.6% Denmark, 0.5% Norway and 0.2% Portugal. IBND has a 6.07 year duration and a 0.05% 30-day SEC yield.

For more information on the credit market, visit our corporate bonds category.