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US Stock Indexes Fell as Rate Hike Possibility Rose

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Why US stock indexes fell last week

US stock indexes fell last week. In this series, we’ll review three US equity indexes that fell from May 10–17, 2016. The fall came after expectations of an interest rate hike revived after solid consumer inflation data.

The Consumer Price Index (or CPI) increased 0.4% month-over-month (or MoM) in April, the largest gain since February 2013, after rising 0.1% in March. CPI rose 1.1% year-over-year (or YoY) in April from 0.9% in March. Core CPI, which excludes volatile food and energy costs, rose 2.1% YoY in April after rising 2.2% in March.

Atlanta Fed President Dennis Lockhart said at a lunch sponsored by the news site Politico, “I think it certainly could be a meeting at which action could be taken.” He was referring to the Fed’s next policy meeting on June 14–15, 2016.

From May 10–17, the S&P 500 index, tracked by the Vanguard 500 Index Fund Investor Class (VFINX) and the SPDR S&P 500 ETF (SPY), fell 1.7% each. The Dow Jones Industrial Average (DJIA) fell 2.2%, and the NASDAQ fell 2.0%.

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High-grade bond market

Treasury yields were mixed across the yield curve. Investment-grade bond yields, which take cues from Treasury markets, fell marginally last week. The fall in yields signals that the bond market believes that even though the US economy is proving to be better than expected, growth still remains low.

Junk bonds

Junk bond yields fell 10 basis points week-over-week and ended at 7.7% on May 13, 2016. Due to a fall in yields, the price of mutual funds and exchange-traded funds investing in junk bonds rose in the week ended May 13, 2016. Some of these funds include the American Funds American High-Income Trust – Class A (AHITX), the T. Rowe Price High Yield Fund – Advisor Class (PAHIX), the SPDR Barclays Capital High Yield Bond ETF (JNK), and the iShares iBoxx $ High Yield Corporate Bond Fund (HYG).

This series will cover developments in the primary and secondary markets for high-yield debt and leveraged loans. We’ll start with developments in the high-yield primary market issuance.

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