Why investors see strong fundamentals in investment-grade bonds

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Secondary market trends in investment-grade bonds in the week ending August 29

Treasury yields and U.S. investment-grade bond yields usually move in the same direction. Last week, corporate investment-grade bond yields followed cues from the U.S. Treasuries market. Investment-grade corporate bond yields fell by about five basis points over the week. They fell to 2.93% [1. BofA Merrill Lynch US Corporate Master Effective Yield].

Treasury yields (TLT) had fallen over the week on higher demand for safe-haven securities. They also fell as a result of the European Central Bank’s (or ECB) dovish monetary policy stance. You’ll find a detailed analysis of these demand-side factors in Part 3 of this series.

Part 5

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Bond yields and prices move in opposite directions. As a result, returns were positive over the week. The BofA Merrill Lynch U.S. Corp Master Total Return Index Value increased by 0.51% over the week. The Index is up by 7.32% this year. The increase is a result of higher demand for U.S. investment-grade debt and the Fed’s dovish monetary policy.

The effect of lower yields and higher prices for U.S. investment-grade debt was reflected in popular exchange-traded funds’ (or ETFs) price performance. The iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) increased by 0.69% over the week. LQD invests primarily in U.S. corporate investment-grade bonds. LQD includes debt issued by companies like Intel (or INTL) and Apple (or AAPL). Both companies are part of the iShares Core S&P 500 Index ETF (IVV) and the PowerShares QQQ (QQQ).

The Vanguard Total Bond Market ETF (BND) invests primarily in U.S. investment-grade debt. Corporate and U.S. Treasuries increased by 0.38% over the week.

Secondary market flows to investment-grade mutual funds

Investor flows into mutual funds are key momentum indicators. Although they lag market movements, they signal investor sentiment. Investment-grade mutual funds saw net inflows of ~$922 million in the week ending August 27. This marked the 11th straight week of inflows.

Geopolitical crises, in Russia-Ukraine and the Middle East, have shifted investor flows to safer high-quality debt securities. A market correction in junk-rated debt yields in late July shifted flows to better quality debt.

In the next part of the series, we’ll analyze the seven-year Treasury notes auction held last week.

 

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