Why high-grade borrowers are upbeat about market conditions

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High-grade borrowers are upbeat about market conditions

U.S. bond markets exhibited different trends for investment-grade and high-yield investors. On the one hand, investment-grade bond mutual funds saw an increase in fund inflows for the eighth consecutive week, while high-yield investors took money off the table in record outflows.

Part 1

Investment-grade bonds (AGG) are deemed safer than high-yield debt. They consist of safe securities like those issued by the U.S. Treasury. They also include debt issued by very highly-rated companies like NASDAQ-100 (QQQ) and the S&P 500 Index (IVV) components, Comcast and Apple.

U.S. investment-grade bonds are also often seen as a refuge for both domestic and international investors when market risk spikes. U.S. bond markets were impacted by Argentina’s sovereign debt default and Portugal’s banking crisis, involving one of its most prominent lenders, Banco Espirito Santo.

Recent political events in Gaza and the imposition of sanctions on Russia by the U.S., European Union (or EU), and other countries, and Russia’s imposition of reverse sanctions, also led to a spike in market risk perceptions.

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Both U.S. Treasuries (TLT) and U.S. investment-grade corporate bonds (LQD) benefited last week from rising demand due to events overseas. U.S. Treasury yields, between one to 30 years fell, with the benchmark ten-year yields falling the most, by eight basis points to 2.44%—their lowest since last June.

Bond prices move inversely to interest rates. Due to last week’s fall in yields, returns on U.S. investment-grade debt were positive. The iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) which invests in investment-grade debt issued by U.S. companies, increased by 0.19% over the week ending August 8. The iShares 20+ Year Treasury Bond ETF (TLT), which invests in U.S. Treasury securities, increased by 0.84%.

The price increase was higher for TLT compared to LQD because the former has a longer duration and as a result, price movements are more sensitive to changes in yields. You can reduce your fixed income portfolio’s volatility by employing various strategies like increasing allocations to shorter-dated debt and laddering and looking at floating rate notes as an investment option.

Outlook

Last week, investment-grade bond price movements worked in favor of investors. However, these factors are constantly in flux. In the next section, you can read about major events that will likely influence investment-grade bond prices over the next few weeks.

 

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