Why high-quality bonds reverted to fundamentals ahead of the FOMC

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Nov. 26 2019, Updated 9:51 p.m. ET

A current overview of U.S. investment-grade bond markets

Financial markets worldwide saw high volatility (VXX) after the International Monetary Fund (or IMF) released the updated World Economic Outlook (or WEF) on October 7. In the WEF, the IMF lowered its global growth economic forecast from 3.7% in April to 3.3% in October. The WEF, along with troublesome economic data from Europe, impacted U.S. stock and bond markets. While broad-based equity indices like the S&P 500 Index (SPY) trended lower in the week ending October 17, U.S. Treasuries (TLT) and investment-grade corporate bonds (BND) rallied on the investor flight-to-safety.

Part 1

U.S. economic data and earnings impact stock and bond market ETFs

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The week ending October 24 showed positive U.S. economic data greatly influencing U.S. financial markets. Better-than-expected earnings releases from large cap firms like Proctor & Gamble (PG), Goldman Sachs (GS), and Microsoft (MSFT) spurred the S&P 500 Index (SPY) to its biggest weekly gain of 2014. You can read more on the impact on individual stock and bond market ETFs in Parts 7 and 8 of this series.

In this series…

Stock and bond investors must factor in the following two big events this week:

  • The Fed’s seventh Federal Open Market Committee (or FOMC) meeting due to be held on October 28-29
  • The first estimate for third-quarter U.S. Gross Domestic Product due to release on Thursday, October 30

You’ll read about the FOMC and other fundamental factors affecting bond markets in our outlook section in Part 12 of this series. You’ll also read about the major primary and secondary market trends in investment-grade bonds. Investment-grade bonds include U.S. Treasuries as well as corporate bonds with a rating of BBB- or above as per the ratings guidelines of Standard & Poor’s.

Primary market trends follow fundamentals

The decline in Treasury yields enabled several opportunistic transactions last week. This included the mega bond sale by Verizon (VZ), the largest U.S. telecom company. The relatively high liquidity of Verizon’s debt in the secondary market following its $49 billion record-breaking debt issue in September 2013 ensured strong investor interest. The next two sections will cover the Verizon deal and other primary market trends.

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