Global Rate Rout Pushes High-Grade Bond ETFs to 2013 Lows

(Bloomberg) -- Investment-grade corporate debt is getting drenched in the storm sweeping global interest-rate markets.

Europe’s biggest exchange-traded fund tracking high-grade U.S. corporate bonds fell Thursday to 2013 lows, before paring some of the decline. Meanwhile, its U.S.-listed counterpart, the $33.7 billion iShares iBoxx $ Investment Grade Corporate Bond ETF, or LQD, dropped to its lowest in more than two years.

“The jump in rates is inevitably detrimental to long-duration credit performance, with LQD a classic example,” said Greg Venizelos, a senior credit strategist in London at AXA Investment.

While corporate America’s earnings trajectory looks healthy, rising benchmark rates threaten investment-grade debt with higher average maturities than its lower-rated counterpart.

LQDE and LQD both have an effective duration of about 8.4 years, which means they can gain more when rates drop, but typically suffer stiffer losses when they climb.

“Cognisant of the threat, we have been favoring high yield over investment grade as its higher spread and lower duration makes it more resilient in a rising rate environment,” said Venizelos.

Ten-year Treasury yields climbed as high as 3.23 percent on Thursday in Asian trading, the highest since 2011, after U.S. private-sector jobs bolstered the case for the Federal Reserve to keep raising rates into 2019.

To contact the reporters on this story: Yakob Peterseil in London at ypeterseil@bloomberg.net;Cecile Gutscher in London at cgutscher@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Sid Verma

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