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Investment-Grade Bond Yields Rose on Hawkish Fed Comments

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Investment-grade bond yields

Investment-grade bond yields rose in the week ending November 13 after Federal Reserve officials commented on the possibility of a rate hike in December. It was a surprise that investment-grade bond yields rose despite weak advance retail sales and producer price index (or PPI) data. Advance retail sales grew marginally by 0.1% in October, while the PPI for final demand fell 0.4% in October following a 0.5% drop in September. This clearly indicates that market participants are expecting some gradual tightening of monetary policy during the next Federal Reserve meeting, which is scheduled for December 15–16.

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Comments by Federal Reserve Officials

Last week, several Federal Reserve Officials commented on the possibility of a rate hike.

Loretta J. Mester, president of Federal Reserve Bank of Cleveland, said, “My own assessment is that with the economic progress we’ve made and that I expect to continue, the economy can handle an increase in the fed funds rate. In my view, if economic information continues to come in consistent with the outlook, then there will be a strong case that the conditions for liftoff have been met and it would be prudent for monetary policy to take a step back from the emergency measure of zero interest rates.”

Similarly, other Fed officials such as New York Fed President William Dudley, San Francisco Fed President John Williams, and St. Louis Fed President James Bullard agreed with the rate liftoff. Meanwhile, Chicago Fed President Charles Evans was worried about subdued inflation and slow wage growth.

Yield movement

Corporate bond yields, as seen by the BofA Merrill Lynch US Corporate Master Effective Yield, ended November 13 at 3.52%—a rise of 4 basis points from the previous week and also the highest mark YTD (year-to-date).

The Vanguard Total Bond Market Index Fund Investor Class (VBMFX) provides broad exposure to US investment-grade bonds. The VBMFX invests in investment-grade corporate bonds of companies such as Apple (AAPL), Walmart (WMT), Bank of America (BAC), AT&T (T) and Oracle Corp (ORCL). VBMFX rose 0.21% on the week.

In this series, we’ll look at investment-grade corporate debt issuances for the week ending November 13. First, let’s take a look at how yields on corporate bonds have fared in 2015 so far.

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