Wednesday, June 1, 2011

The Bond Yield

The corporate bond calendar has been huge recently, yet yields have been falling. We should know by now that the supply of bonds rarely affects the bond yield. More specifically, the supply of corporate bonds tends to swell when there are lots of willing buyers. The motto of the issuers is “Issue when they will come.” Demand creates its own supply in the corporate bond market. Demand is driven by the perception of the growth in nominal GDP, which tends to be in the same ballpark as the bond yield.

Even the Fed’s rounds of quantitative easing haven’t always had the anticipated impact on yields. Last year during March, QE-1.0 terminated after the Fed purchased $1.25 trillion in mortgage securities. Nevertheless, the yield fell during the spring and summer months from 4.01% on April 5 to the year’s low of 2.41% in early October because economic growth seemed to be weakening. When the Fed implemented QE-2.0 on November 3, 2010, the 10-year yield had already risen to 2.67% from the year’s low of 2.41%. It continued to move higher, rising to the most recent peak of 3.75% on February 8 this year. That happened because the economy looked to be growing faster late last year. Now, the yield is back down to almost 3% in response to the economy’s soft patch.

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