uploads///Price Movement in the VBMFX and the LQD

Why Investment-Grade Bond Yields Fell despite Solid Economic Data

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Apr. 5 2016, Published 12:50 p.m. ET

Investment-grade bond yields fell

Investment-grade bond yields fell in the week ended April 1 after a dovish outlook from Federal Reserve chair Janet Yellen on a rate hike despite a solid US jobs report and expansion in the manufacturing sector. Yellen was of the opinion that the global economic uncertainty would require a more cautious approach in raising rates this year. Yellen also pointed out that domestic inflation was below the target inflation rate of 2%, and thus it also remains a key concern for the Fed.

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Non-farm payrolls report

The U.S. Bureau of Labor Statistics released its non-farm payrolls report on April 1. Non-farm payrolls rose 215,000 in March, indicating the labor market is strengthening. Employment increased in retail trade, construction, and healthcare while job losses occurred in the manufacturing and mining sector. The rise in consumer spending and the strong housing market has led to job gains in the retail and construction sectors.

The unemployment rate was almost flat at 5.0% in March. Wages increased last month with average hourly earnings rising 0.3%. That lifted the year-over-year earnings gain to 2.3% from 2.2% in February.

Manufacturing sector expands for the first time since August 2015

The Institute for Supply Management (or ISM) reported on April 1 that its manufacturing index rose to 51.8 in March from 49.5 in February. Any reading above 50 signals growth. Although new orders and production improved, factories continued to shed jobs. The data indicate that manufacturing is gaining strength amid a strong dollar and sluggish demand abroad.

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Yield movement and investment impact

Corporate bond yields, as measured by the BofA Merrill Lynch US Corporate Master Effective Yield, fell 13 basis points from the previous week and ended at 3.2% on April 1, 2016.

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 (ORCL). The VBMFX was up by 0.7% week-over-week.

Similarly, the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) provides exposure to US investment-grade corporate bonds. Debt issued by companies such as Verizon (VZ), Goldman Sachs (GS), and General Electric (GE) are among the major holdings of LQD. Due to the fall in yields, the LQD was up by 1.1% week-over-week.

In this series, we will look at investment-grade corporate debt issuances for the week ended April 1 in detail. But first, let’s take a look at how investment-grade bond yields and spreads have fared so far.

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