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Investment-Grade Bond Yields Rise after Fed Comment on Rate Hike

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Comments by Janet Yellen and other Federal Reserve officials

Investment-grade bond yields rose week-over-week after comments made by Janet Yellen, the Fed chief, on the possibility of an interest rate hike later this year. Although economic conditions and employment are improving, she expressed concern about low inflation. She cautioned that if the Fed’s growth expectations were not met, there could be a delay in the rate hike. The next committee meeting is scheduled for October 27–28.

Federal Reserve Bank of Atlanta President Dennis Lockhart, St. Louis Fed Chief James Bullard, and San Francisco Fed Chief John Williams also said that a rate hike remains likely this year, depending on how global and local economic developments pan out.

The Vanguard Total Bond Market Index Inv Fund (VBMFX) provides broad exposure to US investment-grade bonds. The VBMFX invests in investment-grade corporate bonds of companies such as Apple (AAPL), Allergan (AGN), American Airlines Group (AAL), and Oracle Corp (ORCL).

Due to the rise in yields, the weekly return of the Vanguard Total Bond Market Index Inv (VBMFX) fell by 0.25%.

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Caixin/Markit China Manufacturing PMI

On September 23, the flash reading of Caixin/Markit China Manufacturing Purchasing Managers’ Index, or PMI, was released. The manufacturing PMI fell to 47.0 in September after August’s final reading of 47.3.

Investment-grade bond yields fell by 0.13% during the seven days leading up to September 23, as the reading pointed to a sharp contraction in Chinese manufacturing activity. This could adversely impact many US companies such as Apple (AAPL), Boeing Company (BA), and Ford Motor Company (F), which have large business exposure in China.

Yield movement

Corporate bond yields, as seen by the BofA Merrill Lynch US Corporate Master Effective Yield, ended last week at 3.43%—6 basis points higher than the previous week.

We’ll look at investment-grade corporate debt issuances for the week ending September 25 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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