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Housing Starts and Core CPI Pressure Investment-Grade Bond Yields

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Economic data pushes yields up

US investment-grade bonds witnessed rising yields in the week ending May 22, 2015, as some economic indicators pressured yields. Housing starts surged to their highest levels since November 2007.

This report was released before the Federal Reserve released the minutes from its April meeting. This signaled strength in the housing market, leading to views that a rate hike may not be too far out in the future.

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First-time homebuyers

The hopes of first-time homebuyers offered good news for homebuilders D.R. Horton (DHI) and PulteGroup (PHM), both of which target that segment. Strong activity in the Western US is also good news for homebuilders like Lennar (LEN).

Core CPI (consumer price index) data also fueled similar views. The indicator, which rose 0.3% month-over-month in April, indicated inflationary pressures in the economy. Low inflation readings over the past several months have been the primary deterrent in an interest rate hike by the Fed.

However, a few economic releases capped the rise in investment-grade bond yields. The existing home sales report for April showed an unexpected drop. Further, a weak regional manufacturing report from the Philadelphia Federal Reserve also helped Treasuries mitigate some of their losses.

Dovish April minutes soothe high-grade bonds

The minutes of the Fed’s April monetary policy meeting helped the Treasuries and related ETFs like the iShares 20+ Year Treasury Bond Fund (TLT) pare some losses. The minutes showed policymakers’ concerns regarding uneven economic recovery. They opined that this could delay the rate hike.

Also, mixed economic signals could slow the pace of future hikes in the target range of the federal funds rate.

You can read our take on the meeting minutes in our series Fed’s April 2015 Minutes May Signal No Rate Hike in June.

Yield movement

Corporate bond yields, as seen by the BofA Merrill Lynch US Corporate Master Effective Yield, ended the week at their weekly high of 3.14%. The maximum surge in yields was seen on the last trading day, primarily driven by the consumer prices report.

Due to a rise in yields, the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) was negatively impacted. Debt issued by companies such as Verizon (VZ), Goldman Sachs (GS), and General Electric (GE) are among LQD’s major holdings.

In this series, we will take a detailed look at investment-grade corporate debt issuances for the week ending May 22. But first, let’s take a look at how yields on corporate bonds have fared in 2015 so far.

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