The case for investment grade bonds

Investment grade corporate bonds can play an important role in a portfolio, especially in today’s uncertain market environment. Karen explains.

Investors are demonstrating caution midway through 2018 by taking steps to help insulate their portfolios. That’s understandable on the heels of a nine-year bull market in U.S. stocks, given renewed volatility, uncertainty surrounding global trade policies and steadily rising interest rates.

Rather than sit idle in cash, investment grade corporate bonds may offer a mix of stability and income to investors seeking to navigate the current market environment. Investment grade corporate bonds represent something of a middle ground for investors between riskier equities and perceived safe haven assets like Treasury bonds.

For one thing, investment grade corporate bonds are generally less volatile than the broad equity market. Over the past three years, the total return volatility for U.S. investment grade corporate bonds has been roughly 3.4%, compared with total return volatility near 10% for U.S. stocks.[1]

Investment grade bonds are typically issued by high-quality corporations, those with credit ratings between AAA to BBB-. Since corporate bonds carry credit risk, or the potential for default, they tend to offer a higher yield than similar maturity government bonds.

A sweet spot for yields

With the U.S. economy on surer footing, the Federal Reserve has ratcheted up its target short-term interest rate three times over the past year. Markets are pricing in at least one more increase before the end of 2018.

In turn, investors are demanding higher yields on corporate bonds. Longer-maturity investment grade corporate bond yields have increased between 0.4% and 0.8% over the past year, as the chart shows; short-term corporate bond yields are up more than 1.25% in yield over the past year.[2]

Corporate suite

Using corporate bond ETFs to manage investment goals

Investors should think about their investment goals and time horizon when weighing the merits of investment grade corporate bonds. Dividing the corporate bond yield curve into distinct maturity segments, such as 1-5 years or 5-10 years, allows investors to target specific corporate bond maturity profiles depending on their needs, risk tolerance and investing horizons. Exchange traded funds (ETFs) allow investors to assemble customized investment grade corporate bond portfolios.

icon-pointer.svg Learn more about iShares bond ETFs.

 How to think about bond maturity ranges:

  • 1 to 5 years: This range may suit investors who want to reduce vulnerability to the risk of rising interest rates. With corporate bond index yields in this maturity range currently hovering over 3%[5], investor cash flows may help keep pace with inflation, which in June rose 2.9% from a year earlier.[6] This is good news for savers who seek to preserve the purchasing power.
  • 5 to 10 years: This range may reward investors with higher yields but comes with incrementally higher interest rate risk. Known as the “belly” of the yield curve, the 5-10 year maturity range generally offers higher income with an intermediate duration of about 7 years.
  • 10+ years: This range may suit investors aiming to diversify their equity portfolios and are comfortable with interest rate risk. Long-maturity corporate bonds can add diversification because interest rate risk tends to be negatively correlated to the stock market. In times of market stress, stocks tend to fall and higher quality bond prices tend to rise as investors seek perceived safe haven assets. With yields generally higher than bonds with maturities less than 10 years, longer-maturity bonds may serve dual purposes of boosting income and potentially hedging the equity allocation of their portfolios.
  • Broad: Owning bonds of all maturities in a broad index may be worth considering for investors wanting a more general allocation to corporate bonds but without a specific view on the yield curve. Investment grade corporate bonds comprise about one-third of the total U.S. bond market and can serve an important role in portfolios.[7]

Consider using a low-cost bond index ETF to invest in the corporate bond markets.

Maturity Range Investor Objectives Index Yield Index Duration Related iShares Bond ETF Related ETF Expense Ratio
1-5 Years Seek to keep pace with inflation or shorten portfolio duration 3.49% 2.8 iShares Short-Term Corporate Bond ETF (IGSB) 0.06%
5-10 Years Seek income or express a view on the belly of the yield curve 4.16% 6.3 iShares Intermediate-Term Corporate Bond ETF (IGIB) 0.06%
10+ Years Seek income or help diversify against equity market risk 4.67% 13.6 iShares Long-Term Corporate Bond ETF (IGLB) 0.06%
Broad: Entire Curve Seek increased income relative to government bonds, help diversify against equity market risk 4.04% 7.1 iShares Broad USD Investment Grade Corporate Bond ETF (USIG) 0.06%

Source: BlackRock and ICE BofAML as of 7/30/18. 1-5 year maturity range represented by the ICE BofAML 1-5 Year US Corporate Index, 5-10 year maturity range represented by the ICE BofAML 5-10 Year US Corporate Index, 10+Year maturity range represented by the ICE BofAML 10+ Year US Corporate Index and entire curve represented by the ICE BofAML US Corporate Index.  Index duration is the weighted average of the effective duration, which is a measure of interest rate sensitivity, of the bonds in the index as provided by the index provider. The related iShares Bond ETF seeks to the track the indexes shown.  Index performance is for illustrative purposes only.  Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance does not represent actual iShares Fund performance. For actual fund performance, please click on the fund tickers above. 

Karen Schenone, CFA, is a Fixed Income Product Strategist within BlackRock’s Global Fixed Income Group and a regular contributor to The Blog.

Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting or Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This document contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

Diversification and asset allocation may not protect against market risk or loss of principal.

An investment in fixed income funds is not equivalent to and involves risks not associated with an investment in cash.

Buying and selling shares of ETFs will result in brokerage commissions.

The iShares Funds are not sponsored, endorsed, sold or promoted by ICE Data Services, LLC, nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with ICE Data Services, LLC.The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

©2018 BlackRock, Inc. All rights reserved. BLACKROCK and iSHARES are a registered trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.


[1] Data as of 8/1/2018 using three-year rolling standard deviation of monthly returns of the ICE BofAML US Corporate Index for bonds and the S&P 500 Index for stocks.

[2] Bloomberg as of 7/31/2018 using Bloomberg’s BVAL USD US Corporate Investment Grade Yield Curve. The short-term is defined as difference between 2-year yields and longer maturity represented by 30-year and 10-year yields, respectively, from 7/31/2017 and 7/31/2018 using yield to maturity.

[3] Rising Treasury yields reach milestone versus S&P 500 dividend,” Financial Times, May 15, 2018. Past performance does not guarantee future results.

[4] Source: ICE BAML as of 7/31/2018 using the credit spread on the ICE BofAML US Corporate Master Index.

[5] Using the index yield to maturity of the ICE BAML 1-5 Year Corporate Index as of 7/31/2018.

[6] Bureau of Labor Statistics, Consumer Price Index, June 2018 (year-over-year, not seasonally adjusted).

[7] Bloomberg Barclays as of 7/31/2018 using the corporate bond allocation of the Bloomberg Barclays US Aggregate Bond Index.