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Why didn't demand for Treasury notes and bonds rise much?

Part 8
Why didn't demand for Treasury notes and bonds rise much? (Part 8 of 8)

Why investment-grade bond issuance last week beat expectations

Investment-grade bond issuance last week

Investors willing to take a little higher risk than what they find in Treasuries, if they’re in search of higher returns, can consider investing in investment-grade corporate bonds. In addition to interest rate risk, which also affects Treasury securities, corporate bonds are also subject to credit risk, as their bonds aren’t guaranteed by the U.S. government.

Corporate bond yields are thus calculated as the corresponding Treasury yields plus a credit spread to compensate for the additional credit risk that investors bear.

Investment-grade bonds are high-quality corporate bonds rated BBB- and above by credit rating agencies.

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In an improving economy, the credit spread contracts as companies’ operating performance improves. The contraction of credit spreads partially counterbalances the possible increase in interest rates in an improving economy, making corporate bonds a better bet than Treasury bonds. However, it’s worth noting that the credit spreads on corporate bonds are at historical lows. So the spreads’ further contraction due to the improving economy might be limited.

Last week saw an uptick in investment-grade issuances on the back of a drop in medium-term Treasury yields. Corporations issued bonds worth $23.7 billion, up from the previous week’s $19.5 billion. The issuance was higher than analyst expectations of $15 billion to $20 billion.

While new issuances were higher than expected, the fund flows into the U.S. corporate bond market remained subdued, at $1.1 billion for the week, down from $1.7 billion in the previous week.

Major bond ETFs such as the iShares iBoxx $ Investment Grade bond ETF (LQD) and the Vanguard Total Bond Market ETF (BND) gained last week, as yields fell and credit spreads remained at all-time lows.

Investors willing to diversify into the investment-grade corporate bond market to gain additional returns can invest in ETFs such as the iShares iBoxx $ Investment Grade bond ETF (LQD)—or they can invest in bonds issued by corporations like Verizon Communications (VZ), Exxon Mobil (XOM), and General Electric (GE), as these corporations issue bonds regularly.

To learn more about releases that affect your fixed income investments, check out Market Realist’s Fixed Income ETFs page.

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