Investment-Grade Bond Yields Rose amid Robust US Jobs Data

Investment-grade bond yields rose

Investment-grade bond yields rose last week as upbeat US jobs data raised expectations of a rate hike by the end of the year. According to the U.S. Bureau of Labor Statistics, non-farm payrolls increased by 255,000 jobs in July as hiring rose. The jobs gain for June was revised upward to 292,000. The average hourly wage increased by 0.3% month-over-month in July, indicating that the labor market is gaining strength.

However, investment-grade bond issuance rose last week. Issuers wanted to tap the markets quickly ahead of the US presidential election and the possibility of a rate hike by the end of the year.

Investment-Grade Bond Yields Rose amid Robust US Jobs Data

Japan unveils fiscal stimulus

Investment-grade yields rose on August 2, 2016, after the Japanese cabinet approved 13.5 trillion yen ($132.0 billion) in fiscal measures to boost the struggling economy. The new package includes cash payouts to low-income earners and infrastructure spending.

However, Market participants were disappointed with these modest measures. They were expecting a further cut in interest rates and an expansion of the bond purchases program. The yen (FXY) strengthened against the dollar, and the ten-year Japanese bond yield fell after the announcement.

Yield movement and investment impact

Corporate bond yields, as measured by the BofA Merrill Lynch US Corporate Master Effective Yield, rose 8 basis points week-over-week and ended at 2.9% on August 5, 2016.

The iShares iBoxx Investment-Grade Corporate Bond (LQD) invests in US high-grade issuance. It fell 1.2% for the week ended August 5, 2016. The Vanguard Intermediate-Term Corporate Bond ETF (VCIT), which also provides exposure to US investment-grade bonds, fell 1.0% week-over-week. These funds invest in high-grade corporate bonds of Verizon Communications (VZ), Goldman Sachs Group (GS), and Apple (AAPL).

In the next part of the series, we’ll see how the Bank of England’s rate cut and quantitative easing program sparked the US corporate debt market.