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18 May 2020
This past week has seen the US Federal Reserve (Fed) commence purchases of US corporate bond ETFs. At present there is little visibility around what has been bought or, indeed, what is even on the list of potential purchases. The Fed has been vague, suggesting its Secondary Market Corporate Credit Facility (SMCCF) ‘may purchase US-listed ETFs whose investment objective is to provide broad exposure to the market for US corporate bonds.’ The market notice then goes on to say that the preponderance of holdings will be in investment grade (IG) ETFs with the remainder in high yield.
It is rational to assume that the Fed will follow similar guidelines to those issued for the corporate bond purchases, namely that they will only buy bonds out to 5 years. As a result, we continue to view the short end of the IG credit curve as the sweet spot for investors both because Fed buying provides protection and because duration risk is low.
At the same time, the yield pick-up versus government bonds is meaningful at around 150bp for the Bloomberg Barclays 0-3 Year US Corporate Index. With Fed Chairman Powell suggesting little appetite to take the funds rate negative, it is going to be hard for government bonds to post strongly positive returns; as such, a strategy of harvesting the higher corporate yields makes sense.
Spreading the goodwill
There is also a case for being constructive on IG bonds beyond 5 years, in our opinion. Is The investment case is based on the following points: