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Must-know weekly bond market outlook: Investors favor high yield

Chanderlekha Nayar

Why last week ended with below-par data and higher bond issuance (Part 4 of 4)

(Continued from Part 3)

The bond market

Overall, a good number of issuance came to market last week. However, bond market prices were mainly down, as the yield on ten-year U.S. Treasury and BAML Index soared. The week ended on a low note given poor unemployment and manufacturing data. Investors moved back to high yield bonds in search of higher returns.

A slight increase in the U.S. Treasury long-term interest rate

Despite the weaker-than-expected economic indicator, the ten-year U.S. Treasury yield for the last week ended 150 basis points higher. As a result, most bond prices were down. HYG, however, was slightly above the previous week. As per the announcement on January 2014, the Fed is scheduled to taper another $10 billion this month in February 2014, bringing total asset purchase to $65 billion per month.

U.S. leveraged loan market outlook

The Power Shares Exchange-Traded Fund Trust II (BKLN), which seeks to replicate the S&P/LSTA U.S. Leveraged Loan 100 Index, was down 0.04% during the week, while the index was down by 0.1% over the same period. The S&P 500 index, which tracks the broader equity market, initially rallied and then settled slightly above the previous week.

As we mentioned in our outlook for the previous week ended January 31, 2014, the market expects that the long end of the yield curve (the ten-year and above) may increase steadily as tapering continues. The continued rise in interest rates will start eroding bond prices and may end up eating up any gains from bond interest.

To learn more about how fixed income ETFs are reacting to last week’s releases, see the Market Realist series Must-know: Key highlights driving stocks and ETFs this week.

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