uploads/2016/05/Price-Movement-in-the-PTTAX-and-the-LQD-2016-05-181.jpg

Why Did Investment-Grade Bond Yields Fall?

By

Updated

Investment-grade bond yields fell

Investment-grade bond yields fell for the week ending May 13 despite upbeat retail sales and consumer confidence data. The fall in yields signals that the bond market thinks that while the US economy is better than expected, growth still remains low. US high-grade bonds continue to attract German and Japanese investors due to negative yields in Europe and Japan. A fall in yields signifies strong foreign demand for US bonds.

Article continues below advertisement

Meanwhile, Boston Fed president Eric Rosengren said while addressing an audience in Concord, New Hampshire, on May 12, “If the incoming economic data continue to be consistent with gradual improvement in labor markets and inflation getting closer to target, the Fed should be ready to gradually normalize interest rates.” Similarly, Esther George seemed hawkish and said, “current rates are too low for today’s economic conditions.”

Economic data

Advance retail sales rose 1.3% in April—the largest gain since March 2015. Meanwhile, March’s retail sales were upwardly revised to a 0.3% decline instead of the previously reported 0.4% fall. Retail sales were helped by the surge in car sales and online sales.

The University of Michigan’s consumer survey index rose to 95.8 in May—its strongest level since June 2015. Consumer sentiment rose due to an improved outlook for jobs and a rise in income.

Yield movement and investment impact

Corporate bond yields, as measured by the BofA Merrill Lynch US Corporate Master Effective Yield, fell 2 basis points from the previous week and ended at 3.0% on May 13, 2016.

The PIMCO Total Return Fund – Class A (PTTAX) provides broad exposure to US investment-grade bonds. PTTAX invests in investment-grade corporate bonds of companies such as Wells Fargo (WFC), Bank of America (BAC), and UBS Group AG (UBS). PTTAX was up 0.4% 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 LQD’s major holdings. LQD rose 0.2% week-over-week.

In this series, we’ll look at investment-grade corporate debt issuances for the week ending May 13 in detail. First, let’s take a look at how yields and spreads have fared so far in 2016.

Advertisement

More From Market Realist