What effect will the rise in government bond yields have on corporate bonds and the ETFs that track them?
Government bond yields have been rising at an alarming rate. This indicates that fear is starting to leave the markets and some are optimistic that an economic recovery is in sight. This could be good for corporate bonds in that creditworthiness should recover along with profits, states Richard Barley of The Wall Street Journal.
On the other hand, if government yields are rising because of the huge amount of paper being printed to fund record deficits, then corporate bonds could be in trouble. As long as corporate bond yields remain in the 6%-7% range in a low-interest rate world, they will be attractive. Corporate bonds offer a good opportunity for investors, as companies’ cash holdings increase as a result of slimming down operational costs, says an official at MFC Global Investment Management.
- iShares GS $ InvesTop TM Corporate Bond Fund (LQD): up 1.4% year-to-date. It yields 5.7%.
For full disclosure, some of Tom Lydon’s clients own shares of LQD.
Kevin Grewal contributed to this article.