Why Did Investment-Grade Bond Yields Fall Last Week?

Investment-grade bond yields fell

Investment-grade bond yields fell last week after disappointing advance retail sales data and factory gate prices lowered the expectations of an interest rate hike by year end. US retail sales posted no growth in July after recording 0.8% expansion in June. Growth in retail sales has a direct impact on domestic consumption as US consumer spending accounts for ~72% of the US GDP. Further, US economic growth has been weakening throughout the current quarter.

Why Did Investment-Grade Bond Yields Fall Last Week?

The PPI (producer price index), which measures factory gate prices, dropped 0.4% in July, compared to a 0.5% gain in the previous month, due to the lack of consumer demand and cheaper imports. The PPI fell 0.2% on a YoY (year-over-year) basis in July after rising by 0.3% in June.

Weak retail sales data, together with lower economic growth, factory gate inflation, and business activity, suggest that the Federal Reserve is unlikely to make any decisive policy moves in the foreseeable future. Therefore, the Federal Open Market Committee is more likely to leave short-term benchmark interest rates unchanged at 0.25%–0.5% during its next meeting scheduled for September 21.

Yield movement and investment impact

Corporate bond yields, as measured by the BofA Merrill Lynch US Corporate Master Effective Yield, fell 7 basis points week-over-week and ended at 2.78% on August 12, 2016.

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) invests in US high-grade bonds and rose by 1.1% for the week ending August 12. The Vanguard Intermediate-Term Corporate Bond ETF (VCIT), which also provides exposure to US investment-grade bonds, rose by 0.6% week-over-week. These funds invest in the high-grade corporate bonds of Verizon Communications (VZ), Goldman Sachs Group (GS), and Apple (AAPL).

In the next article in this series, we’ll discuss why investors are flocking to the US corporate debt market.