LQD ETF

Tight credit spreads limit LQD ETF's upside potential in current markets. The Fed is guiding fewer rate cuts for 2025 amid heightened inflation risks. I recommend avoiding buying long-duration corporate bonds for now.

The iShares iBoxx $ Investment Grade Corporate Bond ETF has underperformed due to its long duration and sensitivity to rate changes amidst inflation. Credit spreads are at historically low levels, offering no margin of safety in terms of further lowering of credit spreads and yield to maturities. Market concerns around Trump's potential inflationary policies, including tariffs, are impacting inflation expectations and causing upward pressure on rates already.

Low options-adjusted spread (OAS) of IG bonds limits upside potential and increases downside risk, making them less attractive compared to US Treasury bonds. State taxes on corporate bond interest payments further reduce their after-tax yield, making Treasurys more favorable for investors in high tax brackets. Investors bullish on bonds should prefer US Treasurys, while those bullish on corporate credit spreads should consider a barbell strategy involving common stocks of lenders.

I maintain a buy rating on LQD due to its solid 4.8% yield and favorable technical momentum, despite the Fed's rate cuts. LQD offers exposure to a broad range of U.S. investment-grade corporate bonds, with a YTM of 4.82% as of September 2024. The ETF's technicals are strong, with shares trending higher, a bullish RSI, and a breakout above key resistance levels.

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Plenty of investors may be out of office this summer, but ETFs aren't on vacation. Despite ETFs frequently seeing Summer lulls, this year inflows are nearing a record pace.

Fed pivots towards rate-cutting cycle, potential end of a bear market. iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) offers broad exposure to US investment-grade corporate bond market. LQD has diverse holdings, low credit risk, 4.32% yield, and potential for upside appreciation.

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3 Current Market Trends Influencing Investment-Grade Bonds and LQD