The iShares Barclays Intermediate Credit Bond Fund seeks results that correspond generally to the price and yield performance, before fees and expense, of the investment grade credit sector of the United States bond market as defined by the Barclays Capital U.S. Intermediate Credit Bond Index.
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Eyeing better growth and sustained low interest rates, Moody's projects the global default rate to drop to 2.2% this year or 61 companies globally, from 2.9% or 66 companies in 2012.
"Additional factors that support our view of a low default rate in 2014 are the continuous accommodative monetary environment together with ample liquidity, which has and will continue to allow distressed companies to access the capital market and reduce refinancing risk in the near future."
For perspective, the average default rate since 1983 is 4.7%. It is indeed a golden age for corporate borrowers.
"The default rate is non-existent," he says, agreeing that fundamentals in high-yield look good. "Instead of a default cycle, we've had a refinance cycle." The issue, however, is valuation. At the end of 2013, the 30-year Treasury yielded about 4%, while BB corporates "unbelievably" yielded just 4.5% - a "remarkably low incremental yield."
His feelings about overvaluation extend to the investment grade corporate market (LQD) as well.
Most curious to Gundlach is how universally the long bond is hated at 4%, while junk yielding 4.5% gets so much love.
Besides Treasurys, Gundlach sees value in emerging market bonds. The risk is in the currency, but this can be eliminated by buying dollar-denominated paper.
Open for trade today is the ProShares Investment Grade Interest Rate Hedged ETF (IGHG) whose underlying index tries to achieve a duration of zero by offseting corporate debt holdings with a short position in Treasurys.
ProShares this summer launched a similarly hedged fund, but one aimed at high yield, the ProShares HighYield Interest Rate Hedged ETF (HYHG).
As FY2010 winds down, ETF issuers have begun announcing expected capital gains payouts for their product lines. PowerShares expects to pay (pdf) distributions on just 3 of 112 funds with a top payout on PSAU of less than 2% of NAV. iShares expects payouts on just 5 of 219 ETFs with MBB the worst offender at 2.5% of its NAV.