Over the past six quarters, corporate debt has been growing at an average annualized rate of around 9.5%, which exceeds the pre-financial crisis average of 7.5%. The U.S. investment grade credit bond market is now $5 trillion, with double the number of bonds available on the market from 10 years ago. Similarly, the high yield bond market is around $1.3 trillion, with 1.3 times more bonds over the same period, as illustrated below. More offerings in this space provide greater opportunities for investors to create diversified portfolios and get access to bonds across a range of sectors and credit qualities.
To take advantage of the low interest rate environment, corporations have not just been issuing more bonds, but longer maturity bonds as well, allowing them to lock in low rates of funding for extended periods. As a result, the weighted average duration of new investment grade issues has been 7.71 this year compared to 6.38 last year.
Market Realist – Low Treasury yields (TLT)(IEF) have bolstered corporate sector borrowings. Companies issued $237 billion in investment-grade bonds (AGG) in the first quarter of 2014, according to estimates by Thomson Reuters.
Though investors are turning to high yield (HYG)(JNK) and corporate bonds (LQD) for their income needs, they need to be cautious about one fact. Many companies are using the money they raised from corporate bonds to buy back shares from the public instead of using it for growth purposes. As per data from TrimTabs, the U.S. corporate sector bought back $115 billion from the U.S. equity markets (SPY) from mid-December 2013 to March 2014. This trend could be a cause for concern if it’s not corrected soon.
Read on to the next part of this series to learn how you can use ETFs to gain exposure to the corporate bond market.