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Investment-Grade Bonds May Cool After ETF Hauls in $7 Billion


The iShares iBoxx $ Investment Grade Corporate Bond (LQD) is second on the list of top-selling ETFs in 2012 with inflows of more than $7 billion as investors look beyond low-yielding Treasuries for any kind of steady income.

LQD has posted a total return of 11.4% year to date while iShares Barclays 20+ Year Treasury Bond (TLT) has gained 6.1%, according to Morningstar.

The investment-grade corporate bond ETF holds $25.6 billion in assets and pays a 12-month yield of 3.8%, while the Treasury fund is yielding 2.7%, according to manager BlackRock (BLK).

Yet some are worried that investment-grade bond prices have been pushed up so high and yields so low that investors buying into the fixed-income sector now could end up disappointed.

“Investors have been flocking to buy bonds issued by top-rated companies, putting them on pace for a record year of debt raising in the U.S. But some of the biggest fund managers warn that dangers are lurking in what were once seen as the safest investments,” The Wall Street Journal reports.

Some managers, including LQD manager BlackRock, say now could be one of the most dangerous times in decades to lend to investment-grade companies.

“Interest rates are so low and bond prices so high, they warn, that there is little room left for gains. Some worry that even a small increase in interest rates—a traditional enemy of bond returns—could eat away at bond prices,” the newspaper reports.

LQD, the investment-grade bond fund, is trading near an all-time high.

Yield-hungry investors have also piled into junk bond ETFs such as iShares iBoxx High Yield Corporate Bond (HYG) and SPDR Barclays High Yield Bond (JNK) this year. These funds are breaking out to their highest levels since the credit crunch. [High-Yield ETF Breakout Holds Key for Stocks]

HYG and JNK have pulled in flows of $4.9 billion and $3 billion year to date, respectively, according to IndexUniverse data. The speculative-grade debt they hold has lower credit quality than the bonds in LQD.

BlackRock and other asset managers are looking for ways to reduce their exposure to U.S. corporate bonds, WSJ reports.

“Fixed-income is becoming an asset class with more risk to it, and I think people underestimate that,” said Rick Rieder, BlackRock’s chief investment officer of fundamental fixed income, in the article. “It would take very little in the way of a rate increase for investors to lose their total returns across many traditional fixed income sectors.”

iShares iBoxx $ Investment Grade Corporate Bond

Full disclosure: Tom Lydon’s clients own LQD, HYG, JNK and TLT.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.