LQD: Be Careful Of The Dislocation Trap

Summary

• We think higher credit spreads are probable to occur and that the iShares iBoxx $ Investment could face residual backlash after higher yield bonds, especially given the vehicle's sector concentration.
• Unsecured bond exposure heightens risk due to higher loss given default. Moreover, lower rates are anticipated, which could trigger call risk and/or reinvestment risk.
• An effective duration of 7.99 can lead to upside if interest rates settle lower. That said, dislocations usually occur, where duration turns negative in stressed economic environments.
• HYG ETF, which we covered last week, and LQD ETF have both recovered month-over-month but we see plenty of bias in the market, believing the reality of higher market risk will settle in soon.
• Counterarguments include, Fed intervention, a misread on the economy, and LQD's valuable yield, which could come in hand for many investors seeking sustainable carry.

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We recently shared our bearish outlook on the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), where we raised concerns about a pending credit spread spike. In a similar vein, we hold a bearish view of

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