Why Investment-Grade Bond Yields Rose Slightly Last Week



Investment-grade bond yields rose slightly

Investment-grade bond yields rose marginally for the week ending June 17 after fears of Brexit were somewhat relieved following the murder of Jo Cox, member of Parliament, on June 16. Cox wanted the UK to remain in the EU (European Union). British citizens will vote today to decide if the United Kingdom will stay in the EU.

However, yields fell on June 15 after the FOMC (Federal Open Market Committee) left the target range for the benchmark federal funds rate unchanged at 0.25%–0.5% and suggested that interest rates would be hiked at a “gradual” pace, without referring to any specific timing for another increase.

On June 16, the US ten-year yield dropped to 1.52%, the lowest level since August 2012. Even the US equity markets fell after the Fed’s inaction. Financial stocks such as Charles Schwab (SCHW) and KeyCorp (KEY) were among the worst performers. The Financial Select Sector SPDR Fund (XLF) also fell.

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Minutes from the Bank of Japan’s policy meeting

The minutes from the BoJ’s (Bank of Japan) April policy meeting were released on June 14. The minutes indicated that some policy members expressed concern over the Japanese economy and believe that overseas economies continue to pose a risk to Japan’s economy and prices.

The BoJ kept its monetary policy unchanged at -0.1% on some of the reserves held by financial institutions at the central bank. During the meeting, BoJ Governor Haruhiko Kuroda said that the bank would undertake additional easing to achieve the inflation target rate of 2%.

Yield movement and investment impact

Corporate bond yields, as measured by the BofA Merrill Lynch US Corporate Master Effective Yield, rose 1 basis point on June 17 to end at 2.99%—the lowest level since April 30, 2015.

The PIMCO Total Return Fund Class A (PTTAX) provides broad exposure to US investment-grade bonds. Similarly, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) provide exposure to US investment-grade corporate bonds. PTTAX, LQD, and VCIT fell by 0.1%, 0.2%, and 0.1% respectively, for the week ending June 17.

In this series, we’ll look at investment-grade corporate debt issuances for the week ending June 17. First, let’s take a look at how yields and spreads have fared so far in 2016.


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