Risk Levels Growing for Popular Corporate Bond Fund

As more and more investors pile into the iShares IBoxx $ Investment Grade Corporate Bond Fund (NYSE:LQD), so too does the risk for a big price correction.

The ongoing hunt for yield has inflated bond bubbles all around the world.

Driven by central banks that have lowered interest rates to historically low levels, investors are looking anywhere and everywhere for fixed income returns. Companies have responded, in kind, by issuing massive amounts of debt to meet the demand.

One big beneficiary of this trend this year is the iShares IBoxx $ Investment Grade Corporate Bond Fund (NYSE:LQD), which has seen massive inflows as of late. The fund added $1.3 billion in net inflows last month alone. From ETF.com:

Consider that the August inflows brought LQD’s net asset gains for 2016 to an impressive $6.8 billion—the fourth-largest year-to-date net creations among all ETFs and a 20% jump in the fund’s AUM. LQD today has $33 billion in total assets.

This kind of momentum in fund flows creates a dangerous environment should interest rates tick up, as many analysts are expecting them to do. What’s more, many of the companies considered “investment grade” today may not look so safe tomorrow. S&P 500 earnings have declined for five quarters in a row, and many companies are bound to see credit ratings downgrades over the next few months.

With spreads (the yield difference between long-term and short-term debt) tightening, the bond market is set up for a big correction that’s been many years in the making. Investors are advised to tread carefully.

LQD-2016-09-12

The LQD fell $0.32 (-0.26%) to $121.50 per share in premarket trading Monday. Year-to-date, LQD has risen 6.85%.