US Stock Indexes Rally with Japan’s Stimulus and Robust Jobs Data
Why US stock indexes rose last week
The three US stock indexes that we review in this weekly series rose from July 5–12, 2016. Robust US jobs data boosted investor sentiment and eased the fear of a slowdown in the US economy.
Also, the victory of Japan’s Prime Minister Shinzo Abe in the upper house election on July 10 raised the chances of additional stimulus measures. Stocks rallied, and the NASDAQ and the Dow posted their best closes of the year.
From July 5–12, 2016, the S&P 500 Index, tracked by the Vanguard 500 Index Fund Investor Class (VFINX) and the SPDR S&P 500 ETF (SPY), rose 3.1%. The Dow Jones Industrial Average rose 4.1%, and the NASDAQ rose 1.7%.
James Bullard, president of the Federal Reserve Bank of St. Louis, said on July 12 that he still believes one rate increase will be needed in the foreseeable future.
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Why is demand for junk bonds increasing?
Interest rates in the United States are expected to remain low in the near term. So Market participants are eyeing high-yield funds to earn some extra bucks since they offer higher interest rates due to a greater likelihood of default.
Dick Bove of Rafferty Capital said the demand for junk bonds is driven primarily by pension funds. This is because they need higher returns than what’s available through traditional investment strategies. Insurance companies are also looking for higher returns.
High-grade bond market
The U.S. Treasury yield curve flattened last week as short-term Treasury yields rose after a strong jobs report. This raised expectations for a rate hike in 2016. Long-term yields plunged due to a strong demand from global investors amid negative yielding debt worldwide and global growth concerns after the Brexit vote. For more on this, you can read Long-Term US Treasuries Rally Due to Global Demand.
Meanwhile, investment-grade bond yields fell on high demand from foreign investors due to negative interest rates abroad. Read on to find out more about high-grade issuance falls amid global uncertainty.
Junk bond yields fell sharply by 29 basis points week-over-week and ended at 6.9% on July 8, 2016. It was the lowest since July 23, 2015. Due to a fall in yields, the prices of mutual funds and ETFs investing in junk bonds rose in the week ended July 8. These ETFs include the American High-Income Trust – Class A (AHITX), the T. Rowe Price High Yield Fund – Advisor Class (PAHIX), the SPDR Barclays High Yield Bond ETF (JNK), and the iShares iBoxx $ High Yield Corporate Bond (HYG).
In the rest of this series, we’ll look at developments in the primary and secondary markets for high-yield debt and leveraged loans.