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Investment-Grade Bond Yields Jump on Hawkish FOMC Minutes

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Investment-grade bond yields soared

Investment-grade bond yields jumped in the week ending May 20 as the FOMC (Federal Open Market Committee) minutes indicated that the Fed (Federal Reserve) may go ahead with a rate hike in June, depending on how economic data pan out. The tone of the minutes was hawkish.

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On Wednesday, May 18, Reuters stated, “CME fed fund futures showed that the probability of a June rate increase by the Fed rose to 34 percent after the release of the FOMC minutes on Wednesday from 19 percent earlier in the day, 15 percent on Tuesday, and less than 1.0 percent a month ago, according to CME Group’s FedWatch.”

Fund managers’ opinions on a rate hike

Most fund managers have a difference in opinion on the timing of the next interest rate hike due to a slowdown in economic activity, tepid job growth, weak inflation, and the Brexit debacle.

According to Rick Rieder of BlackRock, July is the likely candidate for the next rate hike as the Fed will examine economic data and measure the outcome of a June 23 referendum in Great Britain that will decide whether it remains a member of the European Union.

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Mohamed El-Erian, Allianz chief economist, believes the rate hike may be coming, but the timing is uncertain. Similarly, Bill Gross, portfolio manager of the Janus Global Unconstrained Bond Fund, said, “I’m not so sure that June is out.” He stated earlier this month that the weaker jobs report may deter the Fed from going ahead with a rate hike in June. Job growth slipped in April, as non-farm payrolls increased by only 160,000, lower than the consensus estimate.

Yield movement and investment impact

Corporate bond yields, as measured by the BofA Merrill Lynch US Corporate Master Effective Yield, rose 12 basis points from the previous week to end at 3.16% on May 20, 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 and Company (WFC), Bank of America (BAC), and UBS Group AG (UBS). PTTAX fell 0.5% 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 LQD’s major holdings. LQD fell 0.9% week-over-week.

In this series, we’ll look at investment-grade corporate debt issuances for the week ending May 20. First, we’ll take a look at the FOMC minutes.

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