We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. By pressing "Accept All" or closing out of this banner, you accept our Privacy Policy and Terms of Service, revised from time to time, and you consent to the use of all cookies and similar technologies and the sharing of information they collect with third parties. You can reject marketing cookies by pressing "Deny Optional," but we still use essential, performance, and functional cookies.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Bet on Investment Grade Bond ETFs Amid Rising Corporate Default
Read MoreHide Full Article
As the Fed continues to hike interest rates to curb inflation, the corporate bond market is experiencing an increase in default rates. This rise in defaults signifies the challenges that U.S. companies face amid higher borrowing costs and economic uncertainties.
With 41 defaults in the U.S. (more than double the same period last year) and one in Canada so far this year, according to Moody's Investors Service (quoted on CNBC), it is evident that the landscape for corporate bond investing has become more complex.
Investors should note that that defaults often follow financial distress. Companies resort to multiple measures to strengthen their balance sheets before defaults happen.
High Interest Rates
The reason behind the financial distress faced by companies is higher interest rates caused by the steep Fed rate hikes since March 2022. The cost of debt financing has jumped from an average of 4% to 6% over the last 15 years to a range of 9% to 13% currently, per the CNBC article. Higher rates made debt pricier for companies. Those who are in acute need of liquidity or loaded with huge debt find the situation extremely troublesome.
Rising Default Rates and Industry-Specific Risks
The recent surge in defaults has been triggered by several factors, including industry-specific risks and the result of the pandemic. While high interest rates acted as a key headwind, other issues have also contributed to the challenges faced by companies.
For instance, Envision Healthcare, with over $7 billion in debt, filed for bankruptcy due to healthcare-related issues arising out of the pandemic. Bed Bath & Beyond fought a lot due to its large base physical stores while consumers increasingly moved to online shopping. Diamond Sports struggled as customers increasingly chose to avoid cable TV packages, hurting regional sports networks.
Should You Go For Investment Grade Corporate Bonds?
Investment-grade corporate bonds refer to bonds issued by companies that have a higher credit rating, meaning a lower risk of default. These bonds are considered less risky compared to junk or higher-yielding bonds. Investment grade corporate bonds often yield higher than Treasuries.
Investment-grade bonds are normally assigned credit ratings of BBB- or higher by major credit rating agencies like Standard & Poor's, Moody's, or Fitch. These ratings reflect the agencies' assessment of the issuer's ability to meet its debt obligations. With defaults rising in America, it is better to bet on debt of financially sound companies.
iShares IBoxx $ Investment Grade Corporate Bond ETF (LQD - Free Report) charges 14 bps in fees and yields 3.69% annually.
FlexShares Credit-Scored US Long Corporate Bond ETF (LKOR - Free Report) charges 22 bps in fees and yields 4.81% annually.
SPDR Portfolio Long Term Corporate Bond ETF (SPLB - Free Report) charges 4 bps in fees and yields 4.52% annually.
iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB - Free Report) charges 4 bps in fees and yields 4.49% annually.
iShares Interest Rate Hedged Long-Term Corporate Bond ETF (IGBH - Free Report) charges 14 bps in fees and yields 5.69% annually.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Bet on Investment Grade Bond ETFs Amid Rising Corporate Default
As the Fed continues to hike interest rates to curb inflation, the corporate bond market is experiencing an increase in default rates. This rise in defaults signifies the challenges that U.S. companies face amid higher borrowing costs and economic uncertainties.
With 41 defaults in the U.S. (more than double the same period last year) and one in Canada so far this year, according to Moody's Investors Service (quoted on CNBC), it is evident that the landscape for corporate bond investing has become more complex.
Investors should note that that defaults often follow financial distress. Companies resort to multiple measures to strengthen their balance sheets before defaults happen.
High Interest Rates
The reason behind the financial distress faced by companies is higher interest rates caused by the steep Fed rate hikes since March 2022. The cost of debt financing has jumped from an average of 4% to 6% over the last 15 years to a range of 9% to 13% currently, per the CNBC article. Higher rates made debt pricier for companies. Those who are in acute need of liquidity or loaded with huge debt find the situation extremely troublesome.
Rising Default Rates and Industry-Specific Risks
The recent surge in defaults has been triggered by several factors, including industry-specific risks and the result of the pandemic. While high interest rates acted as a key headwind, other issues have also contributed to the challenges faced by companies.
For instance, Envision Healthcare, with over $7 billion in debt, filed for bankruptcy due to healthcare-related issues arising out of the pandemic. Bed Bath & Beyond fought a lot due to its large base physical stores while consumers increasingly moved to online shopping. Diamond Sports struggled as customers increasingly chose to avoid cable TV packages, hurting regional sports networks.
Should You Go For Investment Grade Corporate Bonds?
Investment-grade corporate bonds refer to bonds issued by companies that have a higher credit rating, meaning a lower risk of default. These bonds are considered less risky compared to junk or higher-yielding bonds. Investment grade corporate bonds often yield higher than Treasuries.
Investment-grade bonds are normally assigned credit ratings of BBB- or higher by major credit rating agencies like Standard & Poor's, Moody's, or Fitch. These ratings reflect the agencies' assessment of the issuer's ability to meet its debt obligations. With defaults rising in America, it is better to bet on debt of financially sound companies.
iShares IBoxx $ Investment Grade Corporate Bond ETF (LQD - Free Report) charges 14 bps in fees and yields 3.69% annually.
FlexShares Credit-Scored US Long Corporate Bond ETF (LKOR - Free Report) charges 22 bps in fees and yields 4.81% annually.
SPDR Portfolio Long Term Corporate Bond ETF (SPLB - Free Report) charges 4 bps in fees and yields 4.52% annually.
iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB - Free Report) charges 4 bps in fees and yields 4.49% annually.
iShares Interest Rate Hedged Long-Term Corporate Bond ETF (IGBH - Free Report) charges 14 bps in fees and yields 5.69% annually.