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Why investors are moving into investment-grade bond funds

Must-know: Corporate bond trends in the week ending August 15 (Part 4 of 9)

(Continued from Part 3)

Investors move into investment-grade bond funds

Geo-political crises in other parts of the world usually have a positive impact on U.S. investment-grade bond (LQD) prices. The bonds are seen as safe-haven investments. Negative economic data has a similar impact.

During the week ending August 15, uncertainty in Ukraine-Russia and the Middle East increased the demand for U.S. investment-grade debt (AGG). Demand also got a boost from disappointing retail sales and employment indicators. The indicators are important for the recovery to sustain its current pace.

Bond prices and yields move in opposite directions. As a result, the effective yields on corporate bonds—as represented by the BofA Merrill Lynch U.S. Corporate Master Effective Yield—fell by seven basis points to 2.92% over the week ending August 15. Effective yields are down by 43 basis points since the start of 2014.

Interest rate spreads—as represented by the BofA Merrill Lynch U.S. Corporate Master Option-Adjusted Spread (or OAS)—were unchanged over the week at 114 basis points. Spreads were unchanged because Treasury yields (TLT) also declined over the week. The decline was caused by similar geopolitical and economic growth concerns. The OAS has narrowed by 14 basis points since the beginning of 2014.

Secondary market flows to investment-grade bond mutual funds

Investment-grade bond mutual funds saw net inflows of ~$1.1 billion in the week ending August 15. This was the ninth consecutive week of net inflows. Geopolitical uncertainty climbed and economic data disappointed. This was up sharply from the net inflows of ~$139 million seen in the previous week.

Returns on investment-grade bonds

Returns on investment-grade bonds (BND) were positive in the week ending August 15. The BofA Merrill Lynch U.S. Corp Master Total Return Index Value appreciated by 0.63% over the week. The Index is up by 6.98% this year. The increase was due to higher demand for U.S. investment-grade debt.

What this means for exchange-traded fund (or ETF) investors

Returns on U.S. corporate investment-grade bonds have posted healthy returns in 2014. The iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) has returned 7.21% in 2014—compared to 8.01% on the iShares Core S&P 500 ETF (IVV)—up to August 18.

In the next three parts of the series, we’ll analyze the major trends in the high-yield debt market over the past week.

Continue to Part 5

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