Analyzing the latest trends in high-quality corporate credit markets
U.S. investment-grade corporate bonds (LQD) weathered higher market volatility well in 2014. They’ve been a steady source of returns for investors. They’ve benefited from higher stress in bond markets around the world—notably in Europe (EFA) and geopolitical turmoil in Russia-Ukraine and in the Middle East.
The higher liquidity brought about by the Fed’s monthly bond buying program, benefited stocks and bonds (BND). U.S. stocks (SPY) also benefited from higher corporate earnings brought about by an improving economy. Improved earnings and an accommodative monetary policy kept bond yields and spreads near historical lows on high-grade corporate bonds (AGG).
Fed puts an end to market speculation
However, the Fed removed the additional stimulus. It announced the end of its monthly bond buying program—third round of quantitative easing (or QE3)—on October 29, 2014.
The Fed had been tapering the level of purchases progressively from $85 billion per month last December to $15 billion in September 2014. Now, financial markets worldwide have to cope with the lower levels of liquidity implied by the exit from QE3.
Impact of global stimulus for U.S. financial markets
There are a few bright spots for bond investors, especially high-quality corporate debt and Treasuries. Japan’s expanded stimulus was announced just days after the Fed’s exit. There’s also the possibility that the European Central Bank (or ECB) will follow Japan’s example and boost the struggling Eurozone economy. Expanded stimulus by central banks usually boosts liquidity in global financial markets (or QWLD).
Corporate investment-grade bonds also have a few other positives that would help them cope with the Fed’s QE3 exit. There’s also the inevitable monetary tightening that will likely follow sometime in 2015.
In the next part of the series, we’ll discuss the latest primary market action in high-quality corporate credit markets.