Rate volatility raises short-term corporate bond demand

Bonds funds are offered for long, intermediate or short term with varying maturities and buying-selling options. These funds measure the exposure sensitivity to offer interest rates.  These are offered mostly as coupons, where the buyer gets interest when the bond matures. Sometimes, businesses sell short-duration bonds of 270 days or lesser number of days, and it provides immediate capital boost to the company.  There are various provisions such as call provision if the rates changes and the investors can sell the bond before it matures.

Many bond-holders are withdrawing money from the junk funds, and the US reports claim - the outflow from these funds in the last three months was over $47 billion. Rate unpredictability led to cumulative withdrawals.  The concerns over ECB’s stimulus and interest rates have been the main factors for reduced inclination. The withdrawal from medium and long-term investment grade corporate debts was over $1 billion in the initial week of September. This year the bonds lost up to 2.1 per cent as per Bloomberg Barclay’s index.

Some of the riskier junk bonds fared better but even there the buyers withdrew over $800 millions in September second week. The short-term options are less exposed to rate fluctuations and have fared better as compared to long-term and intermediate term options. In US, most cumulative withdrawals were reported for long and medium-term funds. Higher risk in such options concerned U.S. investors and the new data by ECB indicates it lowered rates on such bonds (Merrill Lynch report).

ECB is eliminating risky funds and trying to accumulate liquidity. In September, ECB spreads investments in two tiers, moving from lower tier investment grade debt to second lowest to reduce risks. Its purchases of such bonds, in the last week of August, were of value 848 million Euros – way below the pre-summer purchase.

Nineteen companies defaulted on 39 bonds on payments in August of value $6.43 billion in China. The country eased credit conditions to promote investment in such options.
 
Stocks vs. corporate bond funds

A stock provides ownership to the company and one can gain or loose, if the company is gaining or losing, but a bond provides interest rates. Corporate get debt financing through these funds and the companies that are getting consistent earnings through their businesses are able to provide attractive returns.

The investor is paid back prior to the stock holders, in case of bankruptcy. Hence, bonds are less risky.  Some of these options are asset-backed and not mortgaged, which are mostly bought by institutional investors.

Most of the old options with low rates are expected to appear less attractive in the new market and a new bond is offered with higher rates.  E.g. the iShare Short-Term Corporate Bond ETF (IGSB) has been modified and introduced with a new name CSJ where IGSB is based on dollar denominated investment bonds (1 to 5 years maturities).  

Vanguard introduced the intermediate term corporate bond – VCIT, recently. It is one of the largest and least expensive in the category where it charges $7 for investment of $10,000.

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