When the Federal Reserve stepped in to backstop the bond markets back in April, companies felt it safe to go back into the bond issuance waters and take on more debt. With 2021 a global vaccine on the way, less companies could be issuing debt, which might prop up the Invesco Investment Grade Defensive ETF (IIGV ).
It’s a play that taps into classic economic theory: less is more. In this scenario, scarcity through less bonds should help prop up prices. With the expectation that corporate profits will once again pick up in 2021, the need to issue more debt will be tamped down.
Even if that isn’t the case, getting quality bond exposure is always a must, and IIGV gives ETF investors just that. The fund generally will invest at least 80% of its total assets in securities that comprise the Index, which is designed to provide exposure to U.S. investment grade bonds with relatively higher-quality characteristics, including higher credit ratings and shorter maturities.
All eligible bonds are assigned a quality score, which is calculated based on the bond’s maturity and credit rating. The Fund does not purchase all the securities in the Index; instead, it utilizes a “sampling” methodology to seek to achieve its investment objective. The Fund and the index are rebalanced monthly.
Will Less Be More in 2021?
Will less bonds see more price increases? A recent Wall Street Journal report noted that corporate bond borrowing will be less in the new year after a 2020 full of issuance.
“The record corporate borrowing boom fueled by the Federal Reserve’s pandemic response may be coming to an end. Wall Street bankers and investors are preparing for a sharp drop in corporate bond sales next year,” the article noted. “Companies with investment-grade credit ratings will likely issue $1.1 trillion of new bonds in 2021, a 32% reduction from this year, according to research by Barclays PLC. Many are flush with cash after borrowing to bolster their balance sheets through the pandemic’s economic shutdowns.”
“The anticipated decline becomes even sharper after accounting for expected debt repayments, which offset new bond sales,” the article added further. “Analysts at Bank of America Corp. forecast that net new corporate bond issuance will be $63 billion next year. That would be the lowest total since the bank began tracking it in 2002.”
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