Yahoo Finance Why Did Corporate Bond Yields Fall?
Issuance Slowed for Investment-Grade Corporate Bonds (Part 1 of 5)
The dovish FOMC statement
Last week, the major market mover was the FOMC’s (Federal Open Market Committee) meeting. The FOMC has a meeting once every six week. The FOMC is the US Federal Reserve’s committee. It sets the interest rate. The FOMC met on March 17–18 and released a statement. It dropped the usage of the word “patience” from its forward guidance on monetary policy.
Read The Fed’s ‘Patience’ is Gone, but Will Things Change from Here? to learn more about the outcome and implications of the FOMC meeting.
Several market participants expected the FOMC to drop “patience” from its language. However, what drove yields down was the largely dovish stance taken by the FOMC in regards to raising the federal funds rate. It also dialed down its projections on quarterly economic growth and the PCE (personal consumption expenditures) price index. The index depicts economic inflation.
Investment-grade bonds
With the FOMC refraining from an aggressive stance on monetary policy, fixed income instruments, including corporate bonds, get more breathing room. An indication of a rise in the federal funds rate can push the general interest rate higher. If this happens, it would be negative for Treasuries and investment-grade bonds because yields will move higher. In turn, this would push prices lower. It would hurt existing investors.
Investment-grade bonds refer to US Treasuries and corporate bonds. US Treasuries are issued by the U.S. Department of the Treasury. Corporate bonds are issued by high quality corporate borrowers. Standard & Poor’s is a credit ratings agency. It considers issuances with have a rating of BBB- and above as “investment grade.”
ETFs like the iShares Barclays 20+ Year Treasury Bond Fund (TLT), the iShares Barclays 7-10 Year Treasury Bond Fund (IEF), and the iShares Barclays 1-3 Year Treasury Bond Fund (SHY) invest in US Treasuries with varying maturities. In contrast, ETFs—like the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD)—invest in investment-grade corporate debt issues. Debt issued by companies like Verizon (VZ), Goldman Sachs (GS), and General Electric (GE) are among LQD’s major holdings.
Yield movement
After the FOMC released its statement, yields plummeted on March 18. On that day, the BofA Merrill Lynch US Corporate Master Effective Yield had the sharpest one-day movement in the week. The yield fell nine basis points on March 18 to end at 2.97%. Meanwhile, the yield on the three-year and five-year Treasury notes , or T-notes, in the secondary market fell by 15 basis points, or bps, on the day. They closed at 0.92% and 1.41%, respectively.
In this series, we’ll look at investment-grade corporate debt issuances for the week ending March 20 in more detail. First, let’s take a look at how yields on corporate bonds have fared in 2015.
Browse this series on Market Realist: