uploads///Investment Grade Bond Yields in

Investment-Grade Corporate Bonds Keep Watching for Policy Action

By

Updated

Investment-grade corporate bonds

Corporate investment-grade bonds are debt instruments that are rated BBB- and above by 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.

Mutual funds like the Vanguard Total Bond Market Index Inv (VBMFX) and the PIMCO Total Return A (PTTAX) enable investors to invest in corporate investment-grade bonds. These mutual funds invest into investment-grade corporate bonds of companies like Oracle (ORCL), Nike (NKE), and General Electric (GE). They also provide exposure to Treasuries.

Article continues below advertisement

Yield movement in 2015 so far

The first four months of 2015 had seen yields on investment-grade corporate bonds falling, according to the BofA Merrill Lynch US Corporate Master Effective Yield. Safe-haven demand for these bonds, along with the higher yield that they were providing compared to similarly rated instruments of other developed nations had led to a fall in yields. Yields on investment-grade corporate bonds had fallen to a low of 2.84% by mid-April.

At the end of April, yields indicated a rising trend, though their level still remained lower than that of 2014. But June broke the low-level trend in yields. Yields rose to as high as 3.40% on July 13. This was not only the highest level in 2015 year-to-date, it was also the highest level since September 19, 2013.

Yields are heavily influenced by the Fed’s decision on interest rates. However, due to the slow wage growth data, the Fed may delay the much-awaited interest rake hike.

Article continues below advertisement

Spreads in 2015

The BofA Merrill Lynch Option-Adjusted Spread (or OAS) 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 the rating scale of S&P.

If spreads are rising or widening, credit conditions can be assumed to be worsening. Spreads widen also when growth is slow and economic conditions are worsening. Conversely, 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 July 31, 2015, spreads have ranged between 1.29% and 1.58%. On July 31, OAS was recorded as 1.58%, the highest in 2015 so far. Spreads had fallen as the year progressed, except in May, June, and now July. The OAS had averaged 1.50% in January 2015. The average fell to 1.43% in February, to 1.35% in March, and to 1.33% in April. However, in May 2015, spreads averaged 1.34%, and in June, they averaged 1.42%. In July, spreads averaged 1.51%.

Advertisement

More From Market Realist