Global Corporate Bond ETFs Are Taking a Beating

Global corporate bonds and related exchange traded funds have taken a beating this year, and things aren’t turning for the better any time soon.

Year-to-date, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) has fallen 8.2%, the Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) has dropped 6.9%, and the SPDR Portfolio Intermediate Term Corporate Bond ETF (SPIB) has fallen 5.3%.

Meanwhile, the Invesco International Corporate Bond ETF (PICB) has declined 8.5%, and the SPDR Barclays International Corporate Bond ETF (NYSEArca: IBND) has decreased 7.5% so far this year.

“Twelve-month forward excess return expectations from current levels are historically good,” Greg Venizelos, a credit strategist at Axa Investment Managers, told Bloomberg. “This doesn’t mean there is no further downside — it’s a good entry point but could get even better in the weeks ahead. It’s prudent to stay a bit cautious.”

The worldwide investment-grade corporate debt market has shrunk by $805 billion this year, and the global junk market has lost $236 billion, according to Bloomberg data. The $1 trillion decline in the credit market is the biggest dollar drop since records began over 20 years ago.

The retreat in the investment-grade segment also marked the biggest total return loss for high-quality bonds since the Lehman Brothers’ collapse, along with the worst speculative-grade debt performance since the start of the COVID-19 pandemic.

The U.S. investment grade market has shrunk about $440 billion in market value and is on pace for its worst three-month pullback since 1980.

Credit markets have been pummeled due to a number of factors, including rising inflationary pressures that erode real returns, interest rate hikes around the global to combat the surging inflationary pressures, and fears of a global slowdown.

“We are far enough from the inflation picture being clear that you can’t help but think that volatility will persist,” Brad Rogoff, head of global FICC research at Barclays Plc., told Bloomberg.

Meanwhile, the Russia-Ukraine war and Western sanctions on Moscow have added to global supply chain problems and fueled fears over Europe’s reliance on Russian energy.

“We’ve really got a lot of things we have to contend with,” April Larusse, head of investment specialists at Insight Investments, told Bloomberg. Given that “there can be endless talk and quite little progress” between Russian and Ukrainian negotiators, “it’s probably unwise to put a large directional bet.”

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