BTC iShares iBoxx USD Investment Grade Corporate Bond ETF

Today, most measures of credit conditions are positive, with tight spreads across all of fixed income. Even high yield spreads have come in after a short scare last month.

The great American deleveraging has largely been limited to the financial sector (XLF) (IYF). Non-financial debt is still much higher than historical averages.

Last week, high-grade bond yields rose after upbeat US inflation and retail sales data raised the possibility of a rate hike by the year’s end.

Increased life expectancy means a longer investment horizon. With life expectancy increasing, young investors should invest in equities aggressively.

Green bonds carry the same risk-return profile as conventional bonds. However, these bonds fund projects focused on energy efficiency, clean water, transportation, biodiversity, and sustainable waste management.

We can expect muted returns from US equities going forward. US stocks face the prospect of higher interest rates, albeit gradual and from unusually low levels.

In this article, we’ll discuss some of the risks an investor must consider before investing in international bonds. Some of these risks are unique to this asset class.

Under the current uncertain economic circumstances, investors searching for higher yield might turn to fixed income.

The risk-return metric for ten-year Treasuries (IEF) are lowest, but also the safest, with a paltry 1.3% volatility and with an average yield of 4.1%.

Last week, Elliott Management filed its 13F for the first quarter of 2020. In the last quarter, the hedge fund’s AUM was worth around $73.15 billion.

Bond investors should understand the difference between Corporate Bonds and Treasuries. Below is a list of the key differences between the two.

Bond prices and interest rates have an inverse relationship. If an interest rate increases, the price on a bond declines, and vice versa.

The U.S. Treasury Department’s latest issue on January 29, the floating rate note (or FRN) will fulfill two investor needs: participating in anticipated future interest rates increases and protecting principal against default.

On January 29, 2014, the U.S. Treasury Department issued a new class of security: the floating rate note (or FRN). This is the first new security introduced by the Treasury since 1997.

According to the Securities Industry and Financial Market Association, SIFMA, the total U.S. fixed income market size is about $38.6 trillion.

Credit rating measures the credit-worthiness of a debtor with respect to its financial and operational stability. Rating agencies such as Moody’s and Standard & Poor’s specialize in rating credit to government agencies and corporates.

Leveraged loans (BKLN) are almost always secured or backed by a specific pledged asset or some form collateral. On the other hand, high yield bonds (JNK) may be secured or unsecured.

Another item that differentiates leveraged loans from high yield bonds is “covenants,” or the financial health metrics that issuers must adhere to.

Default rate is a key metric of credit risk and is defined as the risk that the counterparty will default on its financial obligations.

A lower credit rating means higher risk, and therefore, higher yield as investors look for the premium to take the risk and vice versa.

This week is full of indicators, with most of them being measures of national-level economic activity.

Bond yields and prices move in opposite directions. As a result, returns on high-quality corporate bonds were positive. This year, demand for U.S. investment-grade debt benefited from geopolitical tensions overseas and economic growth fears in the first quarter. This raised prices and lowered yields on high-quality corporate bonds.

U.S. investment-grade bonds can provide investors with a safe and steady income stream. They’re issued by the U.S. Department of the Treasury and corporates. The issuers have a very high ability to service the debt issued. There’s little risk of default.

The purpose of Treasury auctions is to obtain financing from markets at the most competitive cost. The yield on these securities is determined through a public auction process. These yields affect the secondary market for U.S. Treasuries. Yields and bond prices move in opposite directions.

Widening spreads indicate a slowing economy. Since companies are more likely to default in a slowing economy, credit risk related to their bonds rises.

Historically, high-yield securities have outperformed investment grade securities in good times and vice versa in hard times.

Yields on bonds don’t remain constant. When they change by the same magnitude across maturities, we call the change a “parallel shift.”

In normal conditions, the yield curve is upward-sloping. As bonds pay only interest (the coupon) until maturity and pay face value at maturity, investors take longer to recover their principal.

Owning an ETF comes with some fees. These fees are called “expense ratios” because they’re expressed as a percentage of a fund’s assets.

Other than the operating costs of an ETF, the other hidden cost that affects the return for investors is the bid-ask spread.

To see how expense ratios can affect investments over time, let’s compare the returns of several fixed income ETFs that differ only in expense ratio.

FRNs are usually issued in capital markets, whereas leveraged loans are arranged by commercial and investment banks. While FRNs are typically unsecured and investment-grade, leveraged loans are secured.

The inflation and interest rate expectations of consumers and firms are important variables determining bond prices.

Major deals included debt issues by Wells Fargo (WFC), Baidu, AT&T, and Verizon (VZ).

After three weeks of continuous falls, US bond yields rose in the week of September 10. The benchmark ten-year US Treasury yield (BSV) rose by 10 basis points to 2.20% but remains far from the December 2016 high of 2.64%.

For investors in the top tax bracket, municipal bond (XMPT) yields on a tax-equivalent basis are roughly 5.0%.

Last week, investment-grade bond yields jumped 12 basis points and ended at 3.16%, the highest level since April 5, 2016.

I believe that consumption demand patterns among millennials, including an emphasis on quality of life, is somewhat influencing this demand for travel and leisure, tech products and personal services.

Preferred stocks are less volatile compared to common equities. This is mainly because a larger portion of the returns comes from dividends, which tend to be stable.

Credit markets tend to improve when the economy is improving. The possibility of a default on corporate bonds (LQD) drops, thus causing their yields to fall.

Adding bonds across credit classes helps diversify your bond portfolio. The weight of each category depends on your risk appetite and the business cycle.

If spreads widen further, high-grade bonds will become more attractive because yields and prices are inversely related. A rise in yields indicates falling prices.

There are no free lunches. The risks involved in fixed income investing are two-fold.

Investment-grade bonds are both U.S. Treasuries issued by the U.S. Treasury Department and corporate bonds issued by high-quality corporate borrowers.

Corporate debt is divided into investment-grade and high-yield on the basis of the credit risk associated with the issuer. Credit rating agencies issue ratings to corporations and debt issuance on the basis of associated credit risk.

While credit spreads do give you a good picture of the credit risk of one bond compared to another, it’s not the only factor they represent.