Corporate Bond ETF Risk Eases Up

Includes: HYG, JNK, LQD, PHB
by: Tom Lydon

Investors willing to accept slightly greater risk have been pouring into corporate bond ETFs in search of higher yields and a chance to get on the ground floor of a Corporate America recovery.

Michael Aniero for The Wall Street Journal reports that market participants expect more high-grade issues will be sold as earnings pick up and blackout periods commence. Researchers note that investors are likely feeling more comfortable with corporate debt in light of the strong earnings season just witnessed.

Further underscoring this point, Dow Jones Newswires reports that the value of U.S. corporate bonds were upgraded during the third quarter and topped the amount downgraded. So far this year, upgrades outweigh downgrades, $124.3 billion to $95.8 billion. Ratings services have been more likely to issue upgrades lately as the economy improves.

Sales of corporate bonds hit $204.4 billion in the third quarter, the most since the second quarter of 2008.

Jonathan Bernstein for The ETF Zone doesn’t exactly agree. Bernstein says that although it’s a good time for corporate bond issuers, investors should avoid such bonds. The problem as he sees it: yields are too low and the risks are too high.

But consider that the 10-year Treasury is yielding a paltry 2.48% and even the “low” yields on corporate debt still look appealing. Corporate bond ETFs are also well above their long-term trend lines, and as we often say: you can’t fight the trend.

  • iShares iBoxx $ Investment Grade Corporate Bond (NYSEArca: LQD): yields 4.61%
  • iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG): yields 7.98%
  • PowerShares Fundamental High Yield Corporate Bond (NYSEArca: PHB): yields 6.79%
  • SPDR Barclays Capital High Yield Bond (NYSEArca: JNK): yields 8.42%

Disclosure: Tom Lydon’s clients own shares of LQD and JNK.

Tisha Guerrero contributed to this article.