Key drivers affecting investment-grade bond funds flows

Secondary market activity in high-grade bonds in the week ending September 19

Investment-grade bonds and Treasury yields usually move in the same direction. Risk and return perceptions are similar. As a result of rising Treasury yields, investment-grade corporate bond yields fell by two basis points over the week. They fell to 3.12% on September 19.

Bond yields and prices move in opposite directions. As a result, returns on high-quality corporate bonds were positive. The BofA Merrill Lynch U.S. Corp Master Total Return Index value increased by 0.63% over the week. The Index is up by 5.84% this year. This year, demand for U.S. investment-grade debt benefited from geopolitical tensions overseas and economic growth fears in the first quarter. This raised prices and lowered yields on high-quality corporate bonds.

The Fed’s forward guidance on monetary policy repeatedly stated that yields are likely to stay low for a “considerable time” after the taper ends. For more on Fed Chair, Janet Yellen’s take on forward guidance, please read the Market Realist article, “Must-know: Janet Yellen’s take on the Fed’s forward guidance.”

Returns on U.S. investment-grade bond ETFs versus other stock and bond funds

Bond prices and yields move in opposite directions. Due to the decline in yields, prices of corporate high-grade bond exchange-traded funds (or ETFs) benefited. The iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) was up by ~0.3% over the week ending September 19. The iShares Core Total U.S. Bond Market ETF (AGG) was up by ~0.1%. The Vanguard Total Bond Market ETF (BND) has holdings in Treasuries and high-quality corporate debt. It was up by ~0.1%.

Stock market ETFs were also up. The Dow Jones Industrial Average had a record close on Friday, September 19. This benefited the SPDR Dow Jones Industrial Average ETF (DIA). The DIA increased by 1.75% over the week. The iShares Core S&P 500 ETF (IVV) was up by 1.19%.

Secondary market flows from investment-grade mutual funds

Investment-grade mutual funds saw net inflows of ~$371.3 million in the week ending September 17. This marked the 14th straight week of inflows. Inflows were lower than the previous week’s inflows of $934.1 million. Some investors were apprehensive about the Fed’s Federal Open Market Committee (or FOMC), slated for September 16–17. Investors were wary of an earlier-than-expected rates increase. This impacted flows last week.

We’ll have more on the investor flows in our outlook section in Part 13 of this series. In the next four parts in the series, we’ll look at primary market activity in Treasury bills (or T-bills) last week.

52-week T-bills auction

In the next part of the series, you’ll find details about the 52-week, or one-year, T-bill auction held last week.