Investment grade credit slips as duration risk rises

FILE PHOTO: U.S. one hundred dollar notes are seen in this picture illustration

NEW YORK (Reuters) – A major exchange-traded fund tracking the U.S. investment-grade corporate bond market fell on Friday to its lowest since May 2020, after blowout employment data and comments from Federal Reserve Chair Jerome Powell on Thursday increased duration risk.

BlackRock’s iShares iBoxx Investment Grade Corporate Bond ETF fell to a 10-month low of $129.27 and was last trading down 0.33% to $129.51. Since the start of the year, LQD has lost more than 6%.

The improving economic data and increase in inflation expectations that have driven the U.S. benchmark 10-year Treasury yield to its highest in more than a year have also driven yields up – and prices down – on investment-grade debt. Investment-grade bonds tend to have longer durations than those in the junk-rated market. They are therefore more sensitive to inflation risks, as rising prices erode future value.

Competition from increasingly lucrative Treasury bonds also pushes credit market yields higher as corporate bond issuers must offer investors better returns to hold the riskier debt.

“While both investment grade and high yield have remained fairly orderly to date, we think that there could be some risk in the near term from a more disorderly move higher in rates from current levels,” said Bradley Rogoff head of credit research at Barclays.

The 10-year Treasury yield rose to a fresh 13-month high of 1.625% on Friday morning after the Labor Department reported that the United States created more jobs than expected in February as falling COVID-19 cases and additional pandemic relief from the government boosted hiring.

Treasury yields were also bolstered by comments Thursday from Fed Chair Jerome Powell signaling that the central bank would make no immediate move to cap the recent increase in yields.

While junk-rated corporate debt has performed better in the rising rate environment than investment grade, high-yield ETFs were also slightly lower on Friday morning, in step with U.S. equities. The iShares iBoxx High Yield Corporate Bond ETF had its lowest open since late December, though remained above the three-and-a-half month intraday low hit on March 4.

(Reporting by Kate Duguid; Editing by David Gregorio)

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