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

Investment-Grade Bond Yields Fell on Soft Economic Data



Investment-grade bond yields fell

Investment-grade bond yields fell in the week ended April 15, 2016, after the release of soft economic data. The Federal Reserve has already indicated that it will remain cautious in raising interest rates in the wake of the global economic slowdown and falling commodity prices.

The Fed is unlikely to raise interest rates at the April 26–27 Federal Open Market Committee meeting, but investors will closely watch for cues as to when the Fed is likely to raise rates.

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Economic indicators

The consumer price index (or CPI) rose 0.1% month-over-month in March 2016, after having fallen 0.2% in February. Year-over-year (or YoY), the CPI rose 0.9% in March. The rise in oil prices was partly offset by the fall in the cost of food.

Core CPI, which excludes food and energy prices, rose 0.1% month-over-month and 2.2% YoY in March. The Fed’s target inflation rate is 2%. Weak global outlook and subdued domestic inflation may not give the Fed enough confidence to go ahead with another rate hike in the coming months, even though the labor market is strengthening.

Advance retail sales fell 0.3% in March, mainly due to a fall in auto sales. The data indicate that consumer spending is falling. Consumers are cutting discretionary spending, especially on cars, clothes, restaurants, and online shopping (AMZN).

US industrial production fell 0.6% in March after recording a 0.6% fall in February. These falls were related to falls in mining and automobile manufacturing. The data indicate a slump in the US manufacturing sector.

Meanwhile, the University of Michigan Consumer Sentiment Index fell to 89.7 in April from 91 in March. This was its lowest point since September 2015. It indicated that consumers were concerned about slowing economic growth, which would reduce the pace of job creation.

Yield movement and investment impact

Corporate bond yields as measured by the BofA Merrill Lynch US Corporate Master Effective Yield fell by three basis points from the previous week and ended at 3.1% on April 15, 2016, the lowest year-to-date.

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

Similarly, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) provides exposure to US investment-grade corporate bonds. Debts issued by companies such as Verizon (VZ), Goldman Sachs (GS), and General Electric (GE) are among LQD’s major holdings. Due to a fall in yields, LQD rose by 0.3% week-over-week.

In this series, we’ll look at investment-grade corporate debt issuances for the week ended April 15 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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