Weekly Fixed Income Commentary (June 1, 2023)
Corporate Bond Market Commentary
- High Yield bonds tightened 9 bp last week to an OAS of 453 bp. On a total return basis, US HY was down 0.4% on similarly negative performance from BBs (-0.4%), Bs (-0.4%) and CCCs (-0.4%). On a YTD basis, US HY is now +3.4% with CCCs (+6.1%) still leading Bs (+3.7%) and BBs (+2.5%).
- HY funds reported a net inflow of $1.4 bn last week.
- US HY primary markets were active again last week with ~$5 billion of total volume. MTD issuance now totals ~$22 billion, representing the busiest month since January 2022.
- Investment grade bond spreads tightened 6 bps, but total returns were -0.35% as underlying 10yr UST yields continued to rise from 3.67% to 3.80%.
- New issue IG supply was a modest $13.6 billion. Month-to-date volume is $142.9 billion, up almost 100% from last May’s $72.8 billion. The heavy IG calendar added to the pressure on rates leaking higher.
Our take: Spreads have been resilient in the face of rising yields, but not enough to prevent negative returns lately. However, all-in yields have again entered attractive territory and we advocate increasing exposure to high quality corporate bonds and increasing duration. The sweet spot is BBB/BB and select Bs on credit and extending duration to take advantage of an eventual move lower in rates.
Economic Commentary
- President Biden and Speaker McCarthy reached agreement on a debt ceiling deal that is very much a compromise between the two sides’ starting points. The debt deal easily passed in the House yesterday and is expected to pass in the Senate today, where it has broad support. The WSJ notes the economic drag will be minimal, especially considering how stimulative the budget was this year, though the precise economic effect is unknowable until the budget is put together later this year.
- Despite the SLOOS earlier this month not giving completely satisfying answers, the Atlanta Fed’s latest Survey of Business Uncertainty underscores how strong cash positions are allowing firms to cut back on borrowing while still maintaining business capacity. Only a quarter of the firms surveyed anticipate applying for new credit in the next twelve months, with 60% (45% of total respondents) saying they don’t plan to borrow because they have sufficient cash. If firms are able to circumvent tighter credit conditions by using cash on hand to keep spending, Fed policy will have to work even harder to achieve its goal of cooling aggregate demand.
- JOLTS job openings rose to 10.1 million in April, the highest since January. Layoffs slowed, as did quits. The quits rate has dropped from a peak of 4.5 million last April to 3.8 million now. That is still high. The pre-pandemic peak was 3.6m in mid-2019, but we are at least in the same neighborhood now. The job openings component of the JOLTS data got the headlines, but the more-reliable quits data showed gradual labor market cooling.
Our take: Assuming the debt ceiling bill passes the Senate, which we believe it will, a substantial overhang will be removed from the market. Investors will now refocus on economic data and the upcoming FOMC meeting, where updated dot plots will also be released. Recent Fed speaker rhetoric has been somewhat hawkish, pushing rates higher and probabilities for hikes higher as well. We believe the FOMC will skip June and hike 25bps in July, continue to watch incoming data, with the possibility of another 25bp hike still on the table thereafter. As we have continually stated, the FOMC will err on the side of crushing inflation, and inevitably over-correct in the process, bringing on economic slowdown eventually, although seemingly pushed out a bit longer.
Municipal Bond Market Commentary
- For the week ending May 26, 2023, looking at the data in the 2- and 5-year maturities, high grade tax-exempt bonds outperformed US Treasuries by 21 and 6 bps, and underperformed in 10 and 30 years by 2 and 6 bp. Ratios moved slightly lower on the short end and slightly higher on the long end, with AAA Muni/Treasury ratios ending the week at 67%, 70%, 71% and 93% for the 2-, 5-, 10-, and 30-year tenors. AA Muni/AA Corporate ratio finished the week at 69%, 66%, 63%, and 81% respectively.
- For the period ending May 24, municipal bond funds reported outflows of $847 million.
- The new issue calendar is fairly light this week at $7.85 billion, including $1.6 billion in New York City General Obligation bonds and $700 million in Los Angeles County Tax and Revenue Anticipation Notes.
Our take: In a continuation of the prior week, municipal market yields rose with the selloff in the US Treasury market and continued fund outflows. The tax-exempt muni market remains rich on a historical basis, and we believe it will remain that way for at least the next several months due to strong market technicals, with re-investment dollars exceeding new issuance. Bloomberg currently shows visible net supply at -$20.59 billion. We’ll continue to monitor opportunities but anticipate the primary focus of new investments will be in taxable fixed income securities until tax-exempt municipals cheapen on a relative basis.
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