Bullish investors were rewarded last week with a winning streak of economic data points coupled with a move higher for the majority of equities and bonds. One could sense a huge sense of relief in how the data crossed the tape, with one good news report after another feeding the narrative of a definite pause in Fed tightening. The iShares Investment Grade Corporate Bond ETF (LQD) is now worth a look, notes Bryan Perry, editor of Cash Machine.
For several months inflation has been stubbornly high due to a tight labor market, sticky rental prices, and the high costs for professional services. The market finally got some bullish developments on all three of these key components.
For instance, rental prices for shelter continued slowing down this month, with both annual and monthly rent growth turning negative. Apartments on a national average are now about 1%-2% cheaper than where they were a year ago.
On the employment front, the Job Openings and Labor Turnover Survey (JOLTS) showed that around 8.83 million positions went unfilled over the month of July, down from the 9.582 million recorded in June and extending a run of monthly declines that began in March. The July figure was the lowest since March 2021 and down from the all-time high of 12.027 million recorded in March of last year.
Services inflation in the US eased for the sixth month to 5.7% year-on-year in July 2023, the lowest in over a year, from 5.74% in the prior month. This very big news for consumers, considering food and energy prices ticked higher in August, but do not factor as much in the Fed’s inflation policy being they are more volatile.
With the latest set of data pointing to a further decline in the overall rate of inflation, at some point, assuming inflation is on a glide path to the Fed’s 2% target rate, bonds become a buy for investors and traders.
Fed Funds last traded at the Fed’s 2% target rate back in June-July 2022. The largest liquid investment grade corporate bond ETF is the LQD, paying around 4% and trading at about $105 per share.
When long-term rates were at 2% back in April 2022, shares of LQD were trading at $115. It’s a pretty significant discount where a move back to the 2% level over the course of the next year could potentially return roughly 20%, a juicy return for a bond investor.
Recommended Action: Buy LQD.
