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Economic Indicators Affect Investment-Grade Bond Yield Movement

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Economic indicators

A host of economic indicators, including non-farm payrolls, average hourly earnings, and unemployment, were released last week, and they drove movement in investment-grade bond yields.

Employment in the manufacturing and construction sector has been picking, and this resulted in 215,000 non-farm payroll job additions in July. On August 3, purchasing managers’ index (or PMI) data for July was released by Markit Economics. It showed slight improvement. The manufacturing PMI recorded for July was 53.8 index points while 53.6 was recorded in June. An improvement in business conditions should result in a rise in new orders for industrial companies such as Caterpillar (CAT), United Technologies (UTX), and Boeing (BA).

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The unemployment rate remained unchanged at 5.3% in July while average hourly earnings rose 2.1% year-over-year. The improvement in wage growth is one of the key factors in the Fed’s rate hike decision. It also contributed to a rise in investment-grade bond yields, as it suggests the possibility of a rate hike in 2015.

Fed policymakers’ comment

On August 4, Dennis Lockhart, President of Federal Reserve Bank of Atlanta, said that the economy is mostly ready for a rate hike in September—provided some extreme events don’t occur. This comment led to a rise in Treasury yields, and consequently investment-grade yields also rose. But then, on August 5, Fed Governor Jerome Powell said that no decision has been made regarding rate hike in September.

So, as of now, there’s a lot of speculation in the market. Market participants are unsure about the rate hike’s timing.

Yield movement

Corporate bond yields, as measured by the BofA Merrill Lynch US Corporate Master Effective Yield, ended last week at 3.37%—three basis points higher than the previous week.

Due to a rise in yields, week-over-week returns of the Vanguard Total Bond Market Index (VBMFX) were negative and came in at -0.42%. The VBMFX invests in investment-grade corporate bonds of companies such as Allergan (AGN), American Airlines Group (AAL), and Oracle (ORCL).

In this series, we’ll look at investment-grade corporate debt issuances for the week ended August 7 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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