uploads/2016/05/Price-Movement-in-the-PTTAX-and-the-LQD-2016-05-031.jpg

Why Did Investment-Grade Bond Yields Fall Last Week?

By

Updated

Investment-grade bond yields fell

Investment-grade bond yields fell in the week ending April 29 as soft economic data raised concerns that the economy may not be ready to withstand a rate hike. While labor growth has been improving, inflation remains below the Federal Reserve’s target level, and economic activity has slowed down. Further, the Bank of Japan surprised the Market by not introducing further stimulus measures despite the country’s weak economic outlook, which led to a rise in demand for safe-haven assets.

Article continues below advertisement

Meanwhile, the Fed released its policy statement after the two-day policy meeting, which ended on April 27, 2016. The statement did not provide clear guidance on the next rate hike. Thus, high-grade bond yields fell after the meeting. The Fed may raise rates during the June 14–15 meeting depending on how global and domestic economic developments pan out. However, the possibility of a hike in June looks pretty grim. You can read more about April’s FOMC (Federal Open Market Committee) meeting in our series titled The Fed’s Slow Road Ahead: Reading April’s FOMC Statement.

Soft economic data

The Bureau of Economic Analysis released an advance GDP estimate on April 28. In the first quarter of 2016, the US GDP grew 0.5%—its slowest pace in two years—as compared to the 1.4% expansion in 4Q15. This was also lower than the consensus estimate of 0.7%.

The PCE (personal consumption expenditure) price index—the Fed’s preferred measure of inflation—increased 0.8% YoY (year-over-year) in March, down from 1.0% last month. This was below the Fed’s target inflation rate of 2.0%. Meanwhile, core PCE (PCE excluding the volatile food and energy components) rose 1.6% YoY in March after rising 1.7% in February.

Thus, slow economic growth and subdued domestic inflation failed to provide enough confidence for the Fed to go ahead with a rate hike.

Article continues below advertisement

Yield movement and investment impact

Corporate bond yields, as measured by the BofA Merrill Lynch US Corporate Master Effective Yield, fell 3 basis points from the previous week and ended at 3.11% on April 29, 2016. This is the lowest yield so far this year.

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 and Company (WFC), Bank of America (BAC), and UBS Group AG (UBS). PTTAX rose 0.3% week-over-week.

Similarly, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) provides exposure to US investment-grade corporate bonds. Debt issued by companies such as Verizon Communications (VZ), Goldman Sachs (GS), and General Electric (GE) are among major holdings of LQD. Due to the fall in yields, LQD rose 0.6% week-over-week.

In this series, we’ll take an in-depth look at investment-grade corporate debt issuances for the week ending April 29. First, let’s take a look at how yields and spreads have fared so far in 2016.

Advertisement

More From Market Realist