Investment-grade bond yields fell
Last week, the movement in investment-grade bond yields was driven by Brexit. Investment-grade bond yields fell for the week ending June 24 after the UK (United Kingdom) voted to leave the EU (European Union). Investors rushed to safe-haven assets due to rising global economic risk. The demand for US corporate bonds rose because they offer a higher yield than other global bonds. The appreciating dollar after Brexit also increased the demand for US bonds from the UK and European investors.
The ten-year Treasury yield fell. However, the drop in Treasury yields was less dramatic than the decline in other developed markets. The yield on the German ten-year bund touched a record low of -0.17% after the Brexit vote sparked a worldwide bid for safe-haven assets. Japan’s ten-year yield was at -0.19%. Meanwhile, global stock markets, especially banking stocks (BAC) (RBS) (MS), also fell after Brexit.
Odds of a rate cut are rising!
Before Brexit, most market participants thought that the Fed might increase the rate at least once in 2016. After Brexit, investors are speculating that there won’t be any hike in 2016. However, the Fed might slash the federal funds rate due to global economic risk.
In our view, the Fed may not cut interest rates due to upcoming elections. Also, the US economy is doing better than other developed nations.
Yield movement and investment impact
Corporate bond yields, as measured by the BofA Merrill Lynch US Corporate Master Effective Yield, fell four basis points and ended at 3% on June 24, 2016—the lowest year-to-date.
The PIMCO Total Return Fund – Class A (PTTAX) provides broad exposure to US investment-grade bonds. Similarly, the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) and the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) provide exposure to US investment-grade corporate bonds. PTTAX was flat last week while LQD and VCIT were up 0.3%, and 0.5%, respectively, for the week ending June 24.
In this series, we’ll look at investment-grade corporate debt issuances for the week ending June 24. First, let’s look at how yields and spreads have fared so far in 2016.