Corporate bonds have long been a staple of investors’ portfolios, providing steady income streams and relative safety compared to riskier assets. However, recent data suggests that the tide may be turning against these fixed-income instruments as more and more investors are losing faith in their ability to deliver strong returns. In this blog post, we take a closer look at the latest ETF data to assess whether corporate bonds are still worth including in your investment strategy or if it’s time to shift your focus elsewhere. So buckle up and let’s dive into the world of corporate bond investing!
What are corporate bonds?
Corporate bonds are a type of debt security that are issued by corporations and typically have a higher interest rate than government bonds. They are often used to finance capital expenditures and expansions. While corporate bonds are generally considered to be a safe investment, there has been some concern in recent years about the ability of companies to repay their debt. This has led to a decline in the popularity of corporate bond ETFs (exchange-traded funds).
What is the difference between corporate bonds and government bonds?
The short answer is that corporate bonds are issued by private companies and government bonds are issued by governments. The key difference between the two is that corporate bonds are not backed by the full faith and credit of the issuer like government bonds are. This means that if a company defaults on its bonds, investors may not get their money back. Government bonds, on the other hand, are considered to be much safer because the issuing government can raise taxes or print money to make good on its debt obligations.
Investors have been increasingly turning to government bonds in recent years as concerns about corporate debt levels have risen. This is reflected in data from ETFs that track different bond markets. For example, the iShares Core U.S. Aggregate Bond ETF (AGG) has seen inflows of $13.2 billion so far this year while the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) has experienced outflows of $4.6 billion over the same period.
The trend seems to be driven by worries about corporate balance sheets. Non-financial companies in the S&P 500 had an average debt-to-equity ratio of 1.21 at the end of 2019, up from 0.67 in 2009, according to data from Standard & Poor’s Ratings Services. This increase in leverage leaves companies more vulnerable to a downturn and makes their bonds less attractive to investors relative to government debt.
Why are investors losing faith in corporate bonds?
There are a few reasons why investors may be losing faith in corporate bonds. First, the Federal Reserve has been gradually raising interest rates, which makes bonds less attractive (since they provide fixed income). Second, there is growing concern about the amount of debt that companies are taking on. And third, some investors may be anticipating a market correction and are moving into more defensive investments.
All of these factors have contributed to outflows from corporate bond ETFs in recent months. For example, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) had $2.1 billion in outflows in October 2018, while the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) had $1.6 billion in outflows over the same period.
So far in 2019, HYG has seen $3.8 billion in outflows and JNK has seen $2.7 billion in outflows. This suggests that investor concerns about corporate bonds are not abating and that many are still fleeing the asset class for safer havens.
What is the impact of this loss of faith?
The recent data on ETFs shows that investors are losing faith in corporate bonds. This is having a negative impact on the market for these bonds. Investors are selling their bond holdings and buying other assets, such as stocks and commodities. This is driving up prices for these assets and making it more difficult for companies to raise money through bond issuance. The loss of faith in corporate bonds is also leading to a reduction in lending to companies by banks and other financial institutions. This is because these institutions are worried about getting repaid if the company goes into default. The result of all this is that the cost of borrowing for companies is rising, which will ultimately lead to higher prices for consumers.
What does the future hold for corporate bonds?
It has been a rough few years for corporate bonds. After a long period of stability and growth, corporate bond prices have been volatile in recent years. This has caused some investors to lose faith in the asset class. However, it is important to remember that the bond market is cyclical. Prices will eventually rebound and investors who are patient will be rewarded.
What does the future hold for corporate bonds? It is difficult to say definitively, but there are a few factors that could impact the market. First, interest rates are expected to rise in the coming years. This could cause corporate bond prices to fall as investors seek out higher yielding investments. Additionally, defaults are on the rise as more companies struggle financially. This could lead to more volatility in the market and make it difficult for investors to recoup their losses.
Despite these challenges, there are still reasons to be optimistic about the future of corporate bonds. Many companies have strong balance sheets and are well positioned to weather a downturn. Additionally, corporations have been issuing fewer bonds in recent years, which should help support prices when demand picks back up again. For these reasons, we believe that corporate bonds still offer an attractive investment opportunity for patient investors
Conclusion
Corporate bonds have been a staple of the investing world for years, and the recent ETF data suggests that their popularity may be waning. Investors seem to prefer other asset classes such as stocks and precious metals, which could potentially lead to a shift in global portfolios over time. Whether or not corporate bonds continue to remain popular with investors will depend on how market conditions evolve in the coming months and years. All indications are that investors are taking a close look at their options before deciding where to place their money next, so investors should stay informed about any changes experienced by the corporate bond market.
