Bond Investors Just Swapped Credit Risk for Duration Risk

By Luke Kawa

November 13, 2017 at 07:40 AM

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Investors spooked by the cracks in the junk-bond market are seeking refuge in higher-quality credit.

The $1.9 billion in outflows from the two biggest high-yield exchange traded funds last week were nearly offset by the money poured into these four products over the same period: the iShares iBoxx Investment Grade Corporate Bond ETF (ticker LQD), the iShares Core U.S. Aggregate Bond ETF (ticker AGG), the Vanguard Long-Term Corporate Bond ETF (ticker VCLT) and the iShares 20+ Year Treasury Bond ETF (ticker TLT).

Substantially less credit risk is the common thread running through the ETFs. The four offer exposure to investment grade corporate, government-related and sovereign debt.

But to get a return in the same ballpark as the more than 5 percent return generated by the SPDR Bloomberg Barclays High Yield Bond ETF (ticker JNK) and the iShares iBoxx High Yield Corporate Bond ETF (ticker HYG), investors had to compensate by extending maturities, thereby accepting a different kind of risk.

On average, modified duration — the product's price sensitivity to fluctuations in interest rates — is more than three times higher for the aforementioned four safer ETFs relative to the two junk-bond products.

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