The Fed may have enacted two rate hikes this year but geopolitics and a few downbeat U.S. economic readings have kept U.S. Treasury yields at check. U.S. benchmark Treasury bond yields have hovered in the range of 2.14% to 2.42% this year, with an average of 2.26% (read: Why Investors Poured Money into Global Bond ETFs in Q2).
As of August 16, 2017, the yield on benchmark 10-year U.S. Treasuries was 2.23%, down 4 bps from the day earlier. Trump’s policy uncertainty and Fed minutes which showed policymakers’ suspicion about subdued inflation probably led to this move in the fixed income market. Notably, U.S. consumer prices rose 1.7% year over year in July 2017, falling shy of market expectations of 1.8% and following a 1.6% gain in June.
However, there are still expectations of an announcement of the normalization of the Fed’s $4.5-trillion balance sheet in September. Also, a December rate hike – the third this year if enacted – is still probable. CME Group FedWatch tool indicates that odds of a 25-bps rate hike in December is now 46.8% against 42% on August 15, 2017 (read: Asset Rollback Top Priority of Fed: ETFs in Focus).
Against this uncertain backdrop, yield hungry investors intending to restrict their plays within U.S. boundaries but not trying to expose themselves to stock market uncertainties especially amid overvaluation concerns, may find corporate bonds compelling.
The U.S. corporate bond market has been on a decent path lately as these normally yield more than their Treasury cousins, but with a rise in risk (see all investment grade corporate bond ETFs here).
Below we highlight a few choices:
iShares 10+ Year Credit Bond ETF (CLY - Free Report)
Edgy investors need to be aware of default risks and should thus bet on investment-grade corporate bond ETFs. CLY is one such option. The underlying index of the fund comprises long-term, investment-grade U.S. corporate bonds and U.S. dollar-denominated bonds, including those of non-U.S. corporations and governments, with remaining maturities greater than 10 years. The fund yields about 4.01% annually.
iShares Edge High Yield Defensive Bond ETF (HYDB - Free Report)
The product looks to track an index that offers greater risk adjusted returns, relative to the broader high yield corporate bond market. This bond ETF also aims to lower risks of the high-yield space by targeting two factors — quality and value — as per the issuer.
Since high-yield bonds have a relatively lower credit rating, a low volatility quotient would be intriguing in this case. The fund came into the market on July 11, 2017 and has amassed about $10 million in assets. The 30-day SEC Yield as of August 15, 2017 was 5.47%. It charges 35 bps in fees. Consumer Staples, Energy, Communications, Basic Industry, Consumer Cyclical and Technology get a double-digit weight in the fund. BB-rated and B-rated bonds cover about 80% of the fund (read: High-Yield Bond ETF Space Slowly Turning Defensive).
iShares 0-5 Year High Yield Corporate Bond ETF (SHYG - Free Report)
This option is for investors who have a relatively strong stomach for risks. The fund’s 60% exposure goes to bonds with maturity within zero-to-three years. Effective duration of the fund is 2.21 years which ensures lower interest rate risks. As far as credit quality is concerned, the fund is heavy on BB-rated bonds (44%) followed by B-rated bonds (34.85%). The fund yields about 5.58% annually.
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