Demand For Investment Grade Corporate Paper Accelerates

Investors' love affair with investment grade corporate bonds is heating up. LQD (iShares iBoxx Investment Grade Corporate Bond Fund), the largest investment grade ETF, has returned nearly 12% year-over-year (about 6% better than the S&P500 over the same period).

The share count (a measure of fund inflows into ETFs) for LQD is once again hitting new records, as the ETF continues to trade at premium to NAV (currently some 50bp). The AUM for this ETF is now almost $23 billion, making BlackRock very happy. This is about $35 MM in fees a year just for this one index ETF - no investment decisions required (just follow the iBoxx IG index).

And it's not only the corporate bond ETFs that are growing rapidly. Flows into investment grade mutual funds are on fire.


Seeing this demand, companies out there are tapping historically low financing rates.

Bloomberg: Companies worldwide are selling bonds at the second-fastest pace on record with investors seeing the debt as an alternative to traditional havens such as government securities that are now paying negative yields.

Anheuser-Busch InBev NV, the world’s biggest brewer, and Mexico City-based America Movil SAB de CV lead sales this week of at least $74.2 billion, bringing this year’s total to $2.08 trillion, according to data compiled by Bloomberg. That’s second only to the $2.37 trillion issued at this point in 2009.

Investors are seeking corporate bonds with investment-grade yields that average a record-low 3.13 percent, or 2.13 percentage points more than government securities, and balance sheets that hold near record amounts of cash, according to Bank of America Merrill Lynch index data. At the same time, stocks and commodities are losing money as Europe’s debt turmoil spreads and the global economy falters.

“For an increasing number of investors, corporate bonds are serving as de facto substitutes for Treasury securities, but with higher yields,” Edward Marrinan, macro credit strategist at Royal Bank of Scotland Plc in Stamford, Connecticut, said in a telephone interview. Investment grade bonds are becoming the "new treasuries." That is until some investment grade company runs into trouble.

Note: These low corporate yields are what's driving pensions to become severely underfunded (pensions use high grade corporate yields to discount liabilities).