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Investment-Grade Corporate Bond Yields: Elevated Levels in June

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Investment-grade bonds

Corporate investment-grade bonds are debt instruments that are rated BBB- and above by rating major Standard & Poor’s. Other rating agencies have their own scale of rating a corporate bond as investment-grade. Treasuries are also counted as investment-grade bonds.

If you wish to invest in corporate investment-grade bonds, ETFs like the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) help you do that. LQD invests in investment-grade corporate bonds of companies like Goldman Sachs (GS), General Electric (GE) and Medtronic (MDT). Meanwhile, ETFs like the iShares 7-10 Year Treasury Bond ETF (IEF) invest exclusively in Treasuries.

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Yield movement in 2015 so far

Yields on investment-grade bonds had been down for the first five months of 2015, compared to the levels in 2014. The fall was primarily due to the attraction of global investors towards these US bonds. They were providing a higher yield compared to similar-rated instruments of other developed nations. Yields on investment-grade corporate bonds, according to the BofA Merrill Lynch US Corporate Master Effective Yield, fell to a low of 2.84% by mid-April. These low levels led US corporates and financials, apart from Yankee issuers, to throng the primary market.

Since the end of April, yields showed a rising trend, although their level still remained lower than in 2014. However, June broke the low level trend in yields. It rose to as high as 3.38% intra-week last week. This was the highest level in 2015 YTD (year-to date). It was also the highest level since October 1, 2013. Yields ended the week below the level, though, as worries about Greece exiting the Eurozone brought investors back to the safety of investment-grade bonds.

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Spreads in 2015

The BofA Merrill Lynch OAS (Option-Adjusted Spread) measures the average difference in yields between investment-grade bonds and Treasuries. Securities selected for calculating this spread are the ones that are rated BBB- or higher on Standard & Poor’s rating scale.

If spreads are rising or widening, it can be assumed that credit conditions are getting worse. Spreads also widen when growth is slow and economic conditions are getting worse. In contrast, falling or tightening spreads coincide with faster growth and generally better economic conditions.

In 2014, spreads by this measure had ranged between 1.06% and 1.51%. Until June 12, 2015, spreads have ranged between 1.29% and 1.53%. Spreads had fallen as the year progressed, except in May and now June. The OAS had averaged 1.50% in January 2015. The average fell to 1.43% in February, 1.35% in March, and 1.33% in April. However, in May 2015, spreads averaged 1.34%. So far, in June they’ve averaged 1.39%. Also, spreads are only down 4 bps (basis points) from the level at the end of December 2014.

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