Why Investment-Grade Bond Yields Rose in Week Ended July 17



Economic indicators move bonds

US economic indicators drove movement in investment-grade bond yields last week. A rise in gasoline prices led to an increase in US consumer prices in June. Though the Federal Reserve tracks a different indicator for assessing inflationary pressures in the economy, a pickup in any measure of inflation would cement the chance of a rate hike this year, particularly if and when it affects other measures. Producer prices also rose in June, ticking up by 0.4%.

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Another indicator that read strong was the housing starts for June. Along with starts, building permits also picked up, reaching close to eight-year highs. A pickup in home construction activity is positive for homebuilders such as Lennar (LEN) and Pulte Group (PHM). At the same time, it indicates strength in the economy, as consumers are investing in big ticket items like houses and home products.

Because these indicators could result in a rate hike in 2015, investment-grade bond yields were pushed higher. There were a few negative indicators, however, that pushed yields down.

Although industrial production rose in June, manufacturing production failed to rise for the second consecutive month. Consumer sentiment fell in July, and survey participants remain concerned about global flash points such as Greece and China.

As well, a rebound in oil prices led to a fall in retail sales in June. Though an upward movement in oil prices is beneficial for energy companies including Chesapeake Energy (CHK) and Southwestern Energy (SWN), consumer-oriented companies such as Netflix (NFLX) and Expedia (EXPE) stand to lose. This is because with a larger chunk of their money going towards gas bills, consumers will have less to spare for discretionary items.

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Yellen testimony

Janet Yellen, in a testimony to the US House of Representatives Financial Services Committee, said that the Fed is on course to raise the federal funds rate in 2015. This led to a rise in investment-grade bond yields.

Yield movement

Corporate bond yields, as represented by the BofA Merrill Lynch US Corporate Master Effective Yield, ended last week at 3.35%, lower than in the previous week.

Due to a fall in yields, the price of the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) rose week-over-week. Debt issued by companies such as Verizon (VZ), Medtronic (MDT), and General Electric (GE) are among LQD’s major holdings.

In this series, we’ll look at investment-grade corporate debt issuances for the week ended July 17 in detail. But first, let’s take a look at how yields on corporate bonds have fared in 2015 so far.


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