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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:
The Fed acknowledges that it is not always possible to follow the same restrictive path as the one for credit. When purchasing ETFs, ‘In some cases, the holdings of ETFs may include underlying bonds that have a remaining maturity longer than 5 years at the time of purchase.’
A more serious challenge may be finding a sufficient value of short duration ETFs to purchase. The amount of buying could be substantial with the combined size of both the primary and secondary market CCFs up to $750 billion once leverage is accounted for. At the same time the Fed has restricted itself to buying only up to 20% of an ETF’s outstanding shares. The total value of US IG corporate ETFs listed in the US is $153 billion 1, which implies a purchase potential of just over $30 billion, of which an even smaller proportion will be sufficiently maturity-constrained to suit the Fed. So, barring large creations, it is going to be a struggle to focus buying solely on short duration ETFs. With the window for buying only open until 30 September 2020, this may ultimately push the Fed to purchase some of the broader indices.
Investors displaced from the front end are likely to extend out along the curve. The credit curve is steep relative to the Treasury curve (Figure 1), with the option-adjusted spreads clearly wider at the long end.
Figure 1: Risk-Reward Trade-Off
Source: State Street Global Advisors, Bloomberg Finance L.P., as of 14 May 2020.
A large part of the steepness relates to the fact that the Fed is not expected to buy long-dated bonds. Figure 2 shows the market’s interpretation of the Fed’s plan quite clearly, with the Bloomberg Barclays 0-3 Year Index posting the strongest returns year to date while the 10+ year index is the only one in negative territory.
This poor performance has created some value in the long end. With a yield to worst of over 3.60%, the Bloomberg Barclays 10+ Year US Corporate Bond Index is getting up towards yields seen on emerging market debt funds. The spread in the yield to worst between the 10+ year index and the Bloomberg Barclays 1-10 Year US Corporate Bond Index is at close to its widest levels since late 2017. So the curve is steep and may attract buyers looking to reduce outright exposure to risk assets like equities, high yield and emerging markets.
Figure 2: Total Returns YTD (%)
Source: State Street Global Advisors, Bloomberg Finance L.P., as of 14 May 2020.Past performance is not a reliable indicator of future performance. Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. All results are historical and assume the reinvestment of dividends and capital gains. Visit www.ssga.com for most recent month-end performance. Index returns are unmanaged and do not reflect the deduction of any fees or expenses.
How to play this theme
SPDR offers various ETFs through which investors can access these themes. To learn more about these funds, and to view full performance histories, please follow the links below:
Marketing communication. For professional clients only.
Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400. F+49 (0)89-55878-440.
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Switzerland:The collective investment schemes referred to herein are collective investment schemes under Irish law. Prospective investors may obtain the current sales prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual reports free of charge from the Swiss Representative and Paying Agent, State Street Bank International GmbH, Munich, Zurich Branch, Beethovenstrasse 19, 8027 Zurich as well as from the main distributor in Switzerland, State Street Global Advisors AG, Beethovenstrasse 19, 8027 Zurich. Before investing please read the prospectus and the KIID, copies of which can be obtained from the Swiss representative, or at spdrs.com
United Kingdom: The Companies are recognised schemes under Section 264 of the Financial Services and Markets Act 2000 (“the Act”) and are directed at ‘professional clients’ in the UK (within the meaning of the rules of the Act) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Many of the protections provided by the UK regulatory system do not apply to the operation of the Companies, and compensation will not be available under the UK Financial Services Compensation Scheme.
This document has been issued by State Street Global Advisors Ireland (“SSGA”), regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 145221. T: +353 (0)1 776 3000. Fax: +353 (0)1 776 3300. Web: ssga.com.
SPDR ETFs is the exchange traded funds (“ETF”) platform of State Street Global Advisors and is comprised of funds that have been authorised by Central Bank of Ireland as open-ended UCITS investment companies.
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ETF's worden verhandeld zoals aandelen, zijn onderhevig aan beleggingsrisico, fluctueren in marktwaarde en kunnen worden verhandeld tegen prijzen boven of onder de netto-inventariswaarde van de ETF’s. Brokercommissies en kosten van de ETF zullen het rendement verminderen. De wijzigingen in wisselkoersen kunnen een nadelig effect hebben op de waarde, prijs of inkomsten van een belegging. Verder is er geen garantie dat een ETF zijn beleggingsdoelstellingen zal behalen.
DE SPDR-ETF'S VAN SSGA ZIJN MOGELIJK NIET BESCHIKBAAR OF GESCHIKT VOOR U. DE UITGEDRUKTE MENINGEN/INFORMATIE OP DEZE SITE VORMEN GEEN BELEGGINGSADVIES, FINANCIEEL, JURIDISCH, REGLEMENTAIR, BOEKHOUDKUNDIG OF BELASTINGADVIES. BIJ TWIJFEL DIENT MEN STEEDS ONAFHANKELIJK ADVIES IN TE WINNEN. DE INFORMATIE NOCH ENIGE OPINIE OP DEZE SITE VORMT EEN VERZOEK OF AANBOD VOOR DE AAN- OF VERKOOP VAN AANDELEN VAN DE FONDSEN OF ENIG ANDER FINANCIEEL INSTRUMENT.Standard & Poor’s®, S&P® en SPDR® zijn gedeponeerde handelsmerken van Standard & Poor's Financial Services LLC (S&P); Dow Jones is een gedeponeerd handelsmerk van Dow Jones Trademark Holdings LLC (Dow Jones); en deze handelsmerken zijn in licentie gegeven voor gebruik door S&P Dow Jones Indices LLC (SPDJI) en in sublicentie voor bepaalde doeleinden door State Street Corporation. De financiële producten van State Street Corporation worden niet gesponsord, bekrachtigd, verkocht of gepromoot door SPDJI, Dow Jones, S&P, hun respectieve filialen en externe licentiegevers, en geen van deze partijen doen enige verklaring over de raadzaamheid om te beleggen in dergelijke producten, noch aanvaarden zij enige aansprakelijkheid in verband hiermee, inclusief voor fouten, weglatingen of onderbrekingen van een index.
SPDR-ETF's mogen enkel worden aangeboden en verkocht in rechtsgebieden waar dat is toegelaten in overeenstemming met de geldende regels.
Informatie met betrekking tot Mexico
Deze informatie is geen marketing of aanbieding van effecten en is niet ook niet zo bedoeld, en mag bijgevolg niet als dusdanig worden opgevat. De fondsen waarnaar in dit document wordt verwezen, zijn niet en zullen niet worden geregistreerd onder de Mexicaanse wet op de effectenmarkten (Ley del Mercado de Valores) en mogen in Mexico niet aan het publiek worden aangeboden of verkocht. De documentatie met bekendmakingen in verband met een van de bovengenoemde fondsen mag niet openbaar worden verspreid in Mexico en aandelen van de fondsen mogen niet worden verhandeld in Mexico.
SSGA SPDR ETFs Europe I Plc en SSGA SPDR ETFs Europe II Plc zijn beleggingsmaatschappijen met variabel kapitaal opgericht als fondsen met afzonderlijke aansprakelijkheid tussen de compartimenten volgens de wetten van Ierland en erkend door de Central Bank of Ireland conform de Europese verordening van 2011 over instellingen voor collectieve belegging in effecten. U moet het prospectus en de essentiële beleggersinformatie (KIID) met betrekking tot specifieke SPDR-ETF's aanvragen en zorgvuldig lezen alvorens u belegt. Voor meer informatie en het prospectus/KIID met de kenmerken, kosten en risico's van SPDR-ETF's kunt u nu een prospectus of KIID downloaden, of kunt u deze documenten verkrijgen bij uw financieel adviseur of bij uw lokale SSGA-kantoor.
De in de VS gevestigde SPDR-ETF's die op deze site worden vermeld, zijn enkel toegelaten voor commercialisering in het relevante EER-rechtsgebied conform artikel 42 van de AIFMD (zoals omgezet in nationaal recht van die lidstaat); of kunnen anderszins rechtmatig worden aangeboden of verkocht (inclusief op basis van een verzoek van een professionele/gekwalificeerde belegger). Enkele in de VS gedomicilieerde SPDR-ETF's die op deze site worden vermeld, zijn alternatieve beleggingsinstellingen in de zin van de richtlijn van de Europese Unie inzake beheerders van alternatieve beleggingsinstellingen (Richtlijn 2011/61/EU) (“AIFMD”). SSGA Funds Management, Inc. en State Street Global Advisors Trust Company zijn de beheerders van alternatieve beleggingsinstellingen (“BAB's”) van deze fondsen.
Alvorens u belegt, moet u de beleggingsdoelstellingen, risico's, vergoedingen en kosten van de fondsen in overweging nemen. Een prospectus met deze en andere informatie kunt u downloaden of aanvragen bij uw financieel adviseur. Lees het zorgvuldig alvorens te beleggen.
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