Weekly Fixed Income Commentary (April 27, 2023)
Corporate Bond Market Commentary
- US High Yield widened 3 bp last week to an OAS of 446 bp. The index now sits 35 bp tight to YE22.
- On a total return basis, US HY declined 0.3% on outperformance from CCCs (+0.1%) versus Bs (-0.2%) and BBs (-0.4%). On a YTD basis, US HY is +4.2% with CCCs (+6%) still leading Bs (+4.4%) and BBs (+3.6%).
- HY funds reported a net inflow of $3.1 billion last week.
- US HY primary markets were relatively active last week with ~$3.6 billion of total volume. MTD issuance in US HY now totals almost $16 billion, while YTD issuance totals ~$55 billion.
- IG spreads were 1bp tighter on the week and remained sub 135bp.
- US IG saw inflows of $1.1 billion and $29 billion of new issue supply, led by large banks. We would expect a pickup in IG issuance as more companies come out of earnings blackouts.
Our take: We continue to view the more open HY markets as a healthy sign overall and have several refinancing catalyst-driven trades in the portfolio, as we expect companies to continue to use pockets of strength to chip away at the ’24-’26 maturity wall. These short-dated maturity trades tend to be more insulated from overall day to day market volatility while providing attractive coupon income and upside optionality when the catalyst event occurs. Overall, the market has been relatively flat the last couple of weeks. BBs have lagged a little and are starting to look more compelling again in an effort to remain up-in-quality.
Economic Commentary
- Corporate earnings season thus far has appeared to be a bit better than feared, with an average 1.9% sales surprise and 5.3% earnings surprise thus far. Financials results in particular have been an area of concern, but results so far have been better than feared, with the exception of First Republic.
- Friday’s H.8 data shows bank deposits at small banks inched upward for a second consecutive week, suggesting calm continues.
- The latest Treasury update (April 21) showed additional individual tax receipts of only $11 billion, which could pull-forward the X date on the debt ceiling into early June.
- Durable goods orders were up only 0.3% as aircraft orders drove the headline gain. Core capital goods orders (ex-aircraft and defense) fell 0.4% and February’s 0.1% decline was revised to show a drop of 0.7%. The picture was no better on shipments of these capital goods, which fell 0.4% in March and 0.4% in February.
- The Dallas Fed manufacturing index fell from -15.7 to -23.4, the Philly Fed non-manufacturing index dropped from -12.8 to -22.8, and the Richmond manufacturing fell from -5 to -10, while the Dallas Fed services index rose from -18.0 to -14.4. On balance, regional indices show very weak economic activity.
- UPS reported a drop in revenue for the first time in years and attributed it to consumers spending more on food and rent and having less discretionary money to spend on the goods the company ships. UPS and FedEx are excellent coincident economic indicators.
Our take: The economy is slowing as evidenced by both macroeconomic indicators and corporate earnings from bellwether companies. The complicated questions are how much it is slowing and how quickly. Investors seem to be sanguine about the depth of the downturn and/or the delayed onset pushing into 2H or 2024. We are a little less optimistic and believe markets will start to look ahead and price-in downside risk when Q2 earnings and 2H 2023 outlooks disappoint and the 2H recovery baked into many management team expectations proves elusive. We continue to position the portfolio accordingly – up in quality and maintaining ample liquidity to take advantage of volatility and dislocation.
Municipal Bond Market Commentary
- Last week yields on high-grade tax-exempt bonds rose by 33, 28, 26 and 22 bps in the 2-, 5-, 10- and 30-year maturities underperforming Treasuries by 24, 22, 21 and 18 bps in those spots. As a result, ratios cheapened with AAA Muni/Treasury ratios ending the week at 61%, 64%, 66% and 90% and AA Muni/AA Corporate ratios finishing at 60%, 61%, 59% and 83%.
- For the period ending 4/19/23, tax-exempt funds reported outflows of $2.9 billion, consisting of $2.2 billion of outflows from open-end funds and $630 million of outflows from ETFs. Through this reporting date, aggregate outflows total $5.8 billion.
- This week’s primary market calendar totals $8.4 billion including $500 million Illinois Toll Highway Authority Bonds, $450 million Wisconsin General Obligation Bonds and $340 million Ohio Water Authority Bonds.
- Bloomberg reported total Municipal Bid Wanted activity of $6.3 billion for the week.
Our take: The municipal market functioned well last week as new issue underwriters were able to quickly adjust offered yields early in the week in order to clear a large calendar in the face of significant increases to the AAA tax-exempt scale. While some deals had unsold balances, they cleaned up relatively quickly in the secondary market when bonds were free to trade. The large increase in yields enabled ratios to increase 5-7 % across the curve. Tax-exempt bonds still remain rich relative to Treasuries, but the significant yield move attracted good buyer interest as we moved forward through the week. In addition, funds so far have reported daily inflows for Friday and Monday following last week’s outflows. The increased yields are certainly compelling but perhaps retail investors are also embracing the “safer haven” credit characteristics of tax-exempts in this riskier investment environment. Altogether, we think this is an overall healthy adjustment for the municipal market as we get closer to an anticipated favorable technical environment in the early Summer driven by strong reinvestment dollars.
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