Will the Corporate Bond ETF Rally Last?

A growing appetite for risk is sending investors out of Treasuries and into corporate bond ETFs. But the rally appears to be raising more than a few eyebrows.

The corporate high-yield bond market has rallied around 30% over the last few months as the economy slowly but surely finds some footing, explains Sasha Gera for Financial Post. The average “junk” company is no longer distressed.

Less risky investment-grade corporate bonds are also finding a measure of appeal. U.S. companies raised $903 billion year-to-date, compared with $548 billion at the same time in 2008.

One risk to be mindful of, however, is the influx of corporate bonds as corporations restructure and renew debt. This could lead to an oversupply that would result in prices stagnating or falling, Gera notes.

Dena Aubon for Reuters reports that U.S. corporate bonds may indeed be poised for a pullback before the year is over, as yields have been cut by one-third.

Be prepared with a strategy before investing in this market and be sure to mind the trendlines. Is it too late or too good to be true? These funds are above their 200-day moving averages, and you can’t fight the trend.

• SPDR Barclays Capital High Yield Bond (JNK) up 23.5% year-to-date

• iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD): up 4.5% year-to-date

• iShares iBoxx $ High Yield Corporate Bond (HYG): up 17.7% year-to-date

For full disclosure, Tom Lydon’s clients own shares of LQD.