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Why Did Investment-Grade Bond Yields Fall Last Week?

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Investment-grade bond yields fell

Movement in investment-grade bond yields was driven by aftershocks following the Brexit vote. Last week, investment-grade bond yields fell because investors got worried about the global slowdown and rushed to safe-haven assets. Yields fell after the Bank of England’s governor, Mark Carney, stated his intention to slash rates and start asset purchases if the United Kingdom needed it to stimulate the economy. This resulted in a massive demand for US bonds.

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Recently, the yield on ten-year US Treasury notes fell to 1.4%—a record low on July 1—before recovering later in the day. The yields on the ten-year Gilt have fallen below 1% for the first time in history. The yields on the equivalent German, Swiss, and Japanese bonds also fell deeper into negative territories.

US corporate debt offers a lucrative investment opportunity

US corporate debt is gaining popularity due to stagnant economic growth and low bond yields in other major regions. Although yields on both corporate and government bonds in the US are falling, they’re far more appealing to international investors compared to incredibly low yield investments in Europe and Japan. The European Central Bank included corporate bonds as part of its monetary stimulus. This could give international investors even more incentive to purchase US corporate debt.

Yield movement and investment impact

Corporate bond yields, as measured by the BofA Merrill Lynch US Corporate Master Effective Yield, fell by 9 basis points week-over-week and ended at 2.9% on July 1, 2016.

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, LQD, and VCIT rose 1.2%, 1.8%, and 1.1%, respectively, for the week ending July 1.

In this series, we’ll look at investment-grade corporate debt issuances for the week ending July 1 in detail. First, let’s take a look at how yields and spreads have fared so far in 2016.

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