Investment-Grade Bond Fund Flows Slowed Last Week

Investor flows

Flows into investment-grade bond funds were positive for the seventh consecutive week. According to Lipper fund flow data, investment-grade bond funds saw net inflows of $2.2 billion during the week ended August 17, 2016. This was lower compared to net inflows of $2.5 billion in the week ended August 10.

Investment-grade bond funds saw year-to-date (or YTD) net inflows of $28.0 billion leading up to August 17, 2016.

Investment-Grade Bond Fund Flows Slowed Last Week

Meanwhile, investment-grade bond issuance fell from $45.0 billion in the previous week to $11.8 billion last week.

In the week ended August 19, Standard Chartered (SCBFF), Citigroup (C), Société Générale Bank, Entergy (ETR), and UDR (UDR) were among the largest issuers of investment-grade bonds. You can read more about these issuances in Part Four of this series.

Yield and spread analyses of corporate high-quality debt securities

Investment-grade bond yields usually follow cues from the Treasuries market. Last week, Treasury yields rose across the yield curve after July FOMC (Federal Open Market Committee) minutes suggested that a rate hike could happen as early as September if economic data support it. Investment-grade corporate bond yields nudged up last week.

For the week ended August 19, yields rose by 1 basis point and ended at 2.8%, according to the BofA Merrill Lynch US Corporate Master Effective Yield. The Vanguard Total Bond Market Index ETF (BND) fell by 0.2%, and the iShares Intermediate Credit Bond ETF (CIU) was almost flat in the same period.

Unlike yields, the option-adjusted spread (or OAS) fell by 5 basis points last week and ended at 1.4% on August 19, its lowest level since June 15, 2015. Meanwhile, spreads have fallen by 33 basis points YTD.

The OAS measures the average difference in yield between investment-grade bonds and Treasuries. Thus, a fall in this spread implies that the risk of high-grade bonds relative to Treasuries has decreased.