ETFs for New Indexes Spur Optimism for Corporate Bonds

Mood changes thanks to two new bond indexes and five ETFs due to be launched next week.

Five new ETFs (exchange traded funds) will be issued next week to track the new Tel-Bond indexes that the Tel Aviv Stock Exchange is launching - the Tel Bond-40 and the Tel Bond-60 - raising hopes for a revitalization of Israel's corporate bond market.

The corporate bond industry has had it tough for the past six months. The collapse of the Heftsiba real estate company and the credit crisis that followed put a damper on bond issues, making it harder to raise capital and boosting the yield on corporate bonds traded on the bourse.

That mood changed this week thanks to the two new bond indexes and five ETFs due to be launched next week.

"This development is expected to have a big effect on corporate bond prices and on the earnings of the mutual funds that own such bonds," says Golan Sapir, manager of mutual funds at Prisma Capital Markets.

The Tel-Bond 40 index will consist of the largest and most liquid bond series in the corporate market that are not included in the Tel-Bond 20, while the Tel-Bond 60 will track the bonds in the other two indexes.

Both new indexes will be launched on Sunday, February 3.

Sapir says the companies issuing the ETFs will buy the bonds tracked by the indexes. Sapire predicts that the higher demand will boost bond prices, benefiting both bondholders and mutual funds.

"This is trade, not investment," explains Assa Sasson, a mutual fund manager at Migdal Insurance and Financial Holdings.

"Traders are preparing for the [ETF] issues, and are buying up bonds with the intention of selling them at a higher price, in the wake of the anticipated increased demand," he added.

Sasson notes, however, that if there are significant price hikes and lower yields on these bonds, market forces will bring prices down again.

"Any price increases will be dependent on the response to the ETF issues on these indexes. If a large sum is raised, then the bond prices will rise significantly, but a few million will have no effect. Bonds are different than shares in that investors can check out alternatives with an identical risk and yield, and choose between them," Sasson says.

"If, for example, the yields are similar to those of government bonds, and with identical life spans, investors will ignore the corporate instruments in favor of government bonds that offer the same yield at a lower risk. Thus the yields on the bonds will go back to a level that reflects the risk inherent in them."