Investment-Grade Bond Yields Rise on Rate-Hike Expectations

Investment-grade bond yields nudged up

Investment-grade bond yields rose marginally last week after the minutes from the July 26–27, 2016, FOMC (Federal Open Market Committee) meeting indicated that the next rate hike could come as soon as September 2016, should economic data support it.

The minutes noted that the US economy had overcome two hurdles with the labor market’s improvement and the rally post-Brexit, but that inflation still remained below the Fed’s target of 2%.

Investment-Grade Bond Yields Rise on Rate-Hike Expectations

Meanwhile, market participants are looking forward to further guidance from Fed chair Janet Yellen, who will speak on August 26, 2016, at a meeting of global policymakers in Jackson Hole, Wyoming.

CPI recorded no growth in July

Investment-grade bond yields were flat after the release of the consumer price index (or CPI) on August 16, 2016.

The CPI remained unchanged in July after recording a 0.2% rise in June, while the CPI Ex Food & Energy—also known as the core CPI—rose by 0.1% month-over-month in July. The lack of growth in the CPI was due to lower gasoline and food prices.

Meanwhile, the core CPI rose by 2.2% year-over-year (or YoY) in July compared to its 2.3% rise in June. Subdued domestic inflation is one of the primary reasons that the Fed has remained skeptical about raising the federal funds rate.

Yield movement and investment impact

Corporate bond yields as measured by the BofA Merrill Lynch US Corporate Master Effective Yield rose by 1 basis point week-over-week and ended at 2.8% on August 19, 2016.

The iShares iBoxx Investment-Grade Corporate Bond ETF (LQD) invests in US high-grade issuance and fell by 0.3% in the week ended August 19.

The Vanguard Intermediate-Term Corporate Bond ETF (VCIT), which also provides exposure to US investment-grade bonds, fell by 0.2% week-over-week. These funds invest in the high-grade corporate bonds of Verizon Communications (VZ), Goldman Sachs (GS), and Apple (AAPL).

In the next article, we’ll look at why Yankee issuers have flocked to the US corporate debt market.