Macro Tsimmis

intelligently hedged investment

BUY iShares Investment Grade Corporate Bonds ETF (LQD)

Posted by intelledgement on Wed, 11 Aug 10

Once again, we are darting in here against the macros, this time to go long corporate bonds. This is consistent with our recent sale of the ETF that shorted long-term treasuries (TBT). While in the fullness of time, we anticipate a collapse of the dollar and U.S. treasuries, in the short term, there is a strong flight-to-safety out of (stock) equities and into bonds, whose promise to return your principal whole plus pay you interest in the meantime looks really, really good in comparison to volatile stocks valuations.

And the iShares Investment Grade Corporate Bonds ETF (LQD) is not only paying a decent 5% annualized dividend (paid monthly) but as the Fed has continued to push interest rates down, the valuation of the LQD ETF has appreciated 9% year-to-date. Roll that up together and you have a compounded annual growth rate in excess of 20%.

Of course, if there is even a whiff of a rise in interest rates, then LQD’s valuation will plunge right quick, and in that event, the yield likely won’t save us from a loss. But we do not anticipate that happening anytime soon: not until the market loses faith in the dollar and U.S. government debt. As poorly as the financial crisis in general is being managed, we remain in a deflationary environment in the aftermath of a burst credit bubble, and given that circumstance, we still feel a trigger event for a serious crisis in confidence for the dollar and U.S.-denominated debt is most likely a ways off. So long as the high pressure system remains stationary, all the storm clouds are diverted around it.

Besides, the alternatives for storing wealth—aside from gold which of course we are long—just look so much worse.

So, our plan is simple: the sun is still shining here and we are going to make hay while it lasts.

The LQD ETF is managed to obtain results that correspond generally to the price and yield performance of the iBoxx $ Liquid Investment Grade index. The fund typically invests at least 90% of assets in the bonds of the underlying index, and at least 95% of assets in investment-grade corporate bonds. Generally, no single investment exceeds 1% of the funds assets and the expense ratio is low (0.15%).

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