Corporate investment-grade bonds for the week ending August 22 (Part 3 of 6)
Importance of the Fed’s statements on monetary policy
August is typically a slow month for investment banking activity. This was one factor that contributed to the 63% decline in investment-grade debt issuance last week. Issuance was also affected by the imminent release of the Fed’s July Federal Open Market Committee (or FOMC) meeting minutes.
The FOMC is the U.S. Federal Reserve’s main monetary policy-making body. The Fed’s statements after FOMC meetings are market-moving. They could cause significant moves in stock (IVV) (SPY) and bond (BND) markets. The debt market pays close attention to the FOMC minutes. Decisions on the federal funds rate translate across the credit and maturity spectrum. They affect Treasuries and corporate bonds (AGG) (LQD). The minutes released on Wednesday, August 20.
A decrease in U.S. Treasury yields after the release of the FOMC minutes would probably result in lower yields on investment-grade debt. It would be an advantage for investment-grade borrowers to wait until the minutes are released.
Janet Yellen speaks on the improving jobs market
Fed Chair Janet Yellen spoke about recent labor market trends during her speech at Jackson Hole last Friday—August 22. She’s supported keeping rates low until the labor markets show enough improvement. A dovish statement on the labor market by Yellen would probably send yields lower.
However, the minutes and Yellen’s statement sent yields higher. The FOMC minutes detailed strategies for normalizing the Fed’s monetary policy. Monetary policy normalization would imply raising the federal funds rate. Normalization also implies reducing the size of the Fed’s bloated balance sheet. The Fed would offload its Treasury and mortgage-backed security holdings. As a result, bond yields would increase.
Yellen said the rate of job market improvements has surprised on the upside. If the Fed’s goals are met quicker-than-expected, the rate hike could come sooner that projected. The rate hike also “could be more rapid thereafter.” These statements also sent yields higher.
You’ll read about how investors and markets reacted in Part 5. The next part of the series covers financial market conditions that have a bearing on high-grade bond yields.
Browse this series on Market Realist:
- Part 1 - Must-know: Analysis of market activity in corporate bonds
- Part 2 - Why investment-grade debt issuance is declining
- Part 4 - Financial market conditions are impacting high-grade bond yields
- Budget, Tax & Economy
- Federal Open Market Committee
- Janet Yellen
- investment banking
- monetary policy
- debt market