The capital markets cheered the Federal Reserve’s move to further support the bond market by purchasing up individual debt as opposed to fixed income exchange-traded funds (ETFs). However, don’t expect the central bank to simply take over the bond market in order to prop up the economy.
With this latest move, a CNBC article noted that the Fed “will be essentially creating its own index of bonds that spread across a wide swath of the market and could see the Fed ultimately purchase up to $750 billion worth of securities. The purchases will be made on existing bonds rather than first issues from companies.”
“It’s out of an excess of caution to preserve these gains for market function by following through,” Federal Reserve chairman Jerome Powell said during his semiannual testimony before Congress. “I don’t see us wanting to run through the bond market like an elephant snuffing out price signals, things like that.”
Will the capital markets expect further action from the Fed in terms of the bond market? That depends, noted Powell.
“It’s really going to depend on the level of market function. If the market function continues to improve, then we are happy to slow or even stop the purchases,” Powell said. “If it goes the other way, we will increase.”
For investors looking to get in on the corporate bond rally can look to investment grade options in exchange-traded funds (ETFs). ETFs in this category include the iShares Intermediate Credit Bond ETF (CIU ), iShares iBoxx $ Investment Grade Corp Bd ETF (LQD ) and Vanguard Interm-Term Corp Bd ETF (VCIT ).
Another option is the ProShares Investment Grade—Intr Rt Hdgd (IGHG ). IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index so it invests in long positions in USD-denominated investment-grade corporate bonds issued by both U.S. and foreign domiciled companies and short positions in U.S. Treasuries.
With the Federal Reserve stepping in to purchase corporate bonds to help keep the economy afloat, one ETF to consider is the Goldman Sachs Access Investment Grade Corporate Bond ETF (GIGB ). GIGB seeks to provide investment results that closely correspond to the performance of the FTSE Goldman Sachs Investment Grade Corporate Bond Index.
The fund seeks to achieve its investment objective by investing at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index. The index is a rules-based index that is designed to measure the performance of investment grade, corporate bonds denominated in U.S. dollars that meet certain liquidity and fundamental screening criteria.
