Just little more than a week into the fourth quarter, corporate bond exchange traded funds are riding a wave of momentum.
It’s really just the latest development in what has been a strong year for corporate debt. Michael Aniero for The Wall Street Journal reports that investment-grade borrowers issued $138.4 billion in the third quarter, up from $122.7 billion a year earlier. Speculative grade issuance has already surpassed the full-year total of 2009.
John Gabriel for Morningstar reports that part of the reason ETF investors are stepping out a little further on the risk curve into junk bonds is the desire for higher yields. While flows into high-yield bond ETFs tend to be a little more volatile than some other fixed-income categories, the trend has been decidedly positive in recent months.
Default risk should be the primary concern of investors getting into junk bonds at this time, but for now at least, this market is in an uptrend. But have an exit strategy in place if any trouble appears. Both types of corporate bonds are yielding better than Treasuries these days:
- iShares iBoxx $ Investment Grade Corporate Bond (LQD): yields 4.6%
- iShares iBoxx $ High Yield Corporate Bond (HYG): yields 7.9%
- PowerShares Fundamental High Yield Corporate Bond (PHB): yields 7%
- SPDR Barclays Capital High Yield Bond (JNK): yields 8.6%
Disclosure: Tom Lydon’s clients own shares of LQD and JNK.
Tisha Guerrero contributed to this article.