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Economic Indicators Move Investment-Grade Bond Yields

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Economic indicators

US economic indicators drove movements in investment-grade bond yields last week.

The Producer Price Index (or PPI)—a measure of inflation—was up 0.2% in July while the PPI excluding food and energy was up 0.3% month-over-month. Inflation is one of the key factors that the Fed is looking at for its rate hike decision. A rise in this inflation measure led to a rise in investment-grade bond yields as it signals higher chances of a rate hike.

Another indicator that read strong was industrial production, which rose in July. The industrial and auto sectors saw a rise in new orders. As a result, companies such as Caterpillar (CAT), Boeing (BA), General Motors (GM), and Ford (F) benefitted.

These indicators show that the US economy is accelerating, and this could result in a rate hike in 2015, leading to a rise in investment-grade bond yields.

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China’s currency devaluation

To boost exports and stabilize China’s slowing economy, the Chinese central bank, the People’s Bank of China (or PBoC), devalued its currency for three consecutive days last week. This move resulted in a strong dollar. However, a strengthening dollar should make American products expensive in foreign markets. In turn, this could drag down exports.

Yield movement

Corporate bond yields, as shown in the BofA Merrill Lynch US Corporate Master Effective Yield, ended last week at 3.41%—higher than the previous week.

The Vanguard Total Bond Market Index Inv (VBMFX) invests in the investment-grade corporate bonds of companies such as Allergan (AGN), American Airlines Group (AAL), and Oracle Corp (ORCL). Its week-over-week returns came in at 0.23%.

In this series, we’ll look at investment-grade corporate debt issuance for the week ended August 14 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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