One of the direct consequences of sub-zero sovereign bond yield is reinforcing the ‘dash for yield’. Investors are soaking up large quantities of better-rated fixed-income securities that pay positive returns.
One such security is the Investment Grade Corporate Bonds (LQD). Launched in 2002, this exchanged-trade fund has assets under management of almost $36 billion (Jun-2019). This pool of capital is invested across 2,000+ securities, primarily in ‘investment grade’ corporate bonds. Note: investment grade here means credit ratings of BBB-/Baa or better. According to LQD’s brochure, about 90% of its bonds are BBB and A rated (see below).
What attracted my attention to this ETF is the strength of its rally since last December. From 112 at its December ’18 lows, prices are now approaching 130. The consistency of its advance is remarkable – as is its size. The near-20 point bull run is the largest in a decade.
Source: iShares Brochure
Another corporate bond ETF that is enjoying a similar run is the Vanguard Intermediate Bond ETF (VCIT, see below).
What does LQD’s bull run tell us? For sure, it suggests that there is a persistent ‘flight to quality’, precipitated by falling global economic growth and worsening tariff war between US and China. Investors are not only buying gold and Treasuries, but also higher-quality corporate bonds. As sovereign yields sink lower, investors have no choice but to buy positive-yielding assets.
The question now is: Are we too late to chase these ETFs? Perhaps. These corp ETFs have been advancing for some time above their long-term trends. Even their short-term trends near overbought. Therefore, if holding long positions remain so, but watch to lighten on rallies. If watching to initiate trading buys, wait for a consolidation to achieve better risk-reward ratios.
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Jackson has over 15 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.