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Why the market sees a subdued demand for 30-year Treasury bonds

Mayur Sontakke

Must-know update: Why did the demand for T-bills fall last week? (Part 6 of 6)

(Continued from Part 5)

Last week’s Treasury and investment-grade bond issuance

Apart from weekly auctions of one-month, three-month, and six-month T-bills, last week also saw the 30-year Treasury bond auction on May 8.

The demand for 30-year Treasury bonds remained subdued as seen in the bid-to-cover ratio of 2.09x. The auction size was higher at $16 billion from $13 billion in the April auction.

Investment-grade bonds are high-quality corporate bonds rated BBB- and above by credit rating agencies. In an improving economy, the credit spread contracts when the operating performance of companies improves. The contraction of the credit spread partially counterbalances the possible increase in interest rates in an improving economy, making corporate bonds a better bet than Treasury bonds.

The investment-grade corporate bond market saw an issuance of $20.4 billion across 24 trades. On a year-to-date basis, the investment-grade bond market has seen issuance of $117.4 billion, much higher than expectations.

The investment grade bond market saw inflows of $2.1 billion in the last week. On year-to-date terms, the inflows stand at $35.5 billion.

Major bond ETFs such as iShares iBoxx $ Investment Grade bond ETF (LQD) and Vanguard Total Bond Market ETF (BND) gained last week. Investors willing to diversify into investment-grade corporate bond market to gain additional returns can invest in ETFs such as iShares iBoxx $ Investment Grade bond ETF (LQD). iBoxx $ Investment Grade bond ETF (LQD) follows 600 highly liquid investment-grade corporate bonds with holdings in bonds issued by Verizon Communications (VZ), General Electric (GE), Apple Inc. (AAPL), etc.

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