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Investment-Grade Bond Yields Fell after Yellen’s Hawkish Comments

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Investment-grade bond yields

Investment-grade bond yields fell slightly for the week ending May 27 after Fed Chair Janet Yellen stated that a rate hike would be appropriate in the coming months. While at Harvard University on May 27, she said that the US economy has made “a great deal of progress” and it continues to advance with “inflation metrics expected to rise and the labor market improving.”

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US economic indicators

US economic growth was revised higher to 0.8% in the second estimate for 1Q16—compared to 0.5% reported last month. Economic growth was revised higher due to the rebound in corporate profits and an upward revision for income growth. New home sales rose 16.6% in April to a seasonally adjusted rate of 619,000 units—the highest level since January 2008.

Meanwhile, durable goods orders rose 3.4% in April due to the rise in new orders for commercial jet planes from an upwardly revised 1.9% increase in March. However, the non-defense capital goods orders, excluding aircraft, are a closely watched proxy for business spending plans. The orders fell 0.8% in April from an upwardly revised 0.1% drop in March.

Yield movement and investment impact

Corporate bond yields, as measured by the BofA Merrill Lynch US Corporate Master Effective Yield, fell by 3 basis points for the week ending May 27. They ended at 3.1% on May 27, 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 (WFC), Bank of America (BAC), and UBS Group AG (UBS). PTTAX rose 0.2% for the week ending May 27.

Similarly, the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) provides exposure to US investment-grade corporate bonds. Debt issued by companies such as Verizon (VZ), Goldman Sachs (GS), and General Electric (GE) are among LQD’s major holdings. LQD rose 0.1% for the same period.

In this series, we’ll look at investment-grade corporate debt issuances for the week ending May 27 in detail. First, let’s take a look at how yields and spreads have fared in 2016.

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