Weekly Fixed Income Commentary (June 22, 2023)
Corporate Bond Market Commentary
- High Yield spreads tightened 14bp to +415, the tightest level since mid-March and only 21bp wide of the YTD tights.
- Total returns were +0.5% driven by outperformance of CCCs (+1.0%) versus BBs (+0.3%) and Bs (+0.5%). On a YTD basis, HY is +5.4% with CCCs +9.9%, BBs 4.2% and Bs +5.8%.
- HY funds saw an inflow of $615 million, and only $895 million of new issue supply priced in the week.
- Investment grade spreads tightened 5bp to +135 and yields fell 2bp resulting in +0.4% total return for the week.
- It was a light week for IG issuance with only $10.4 billion of supply, missing the estimated $15 billion to $20 billion expected for the week. Year-to-date issuance of $680 billion is down -1.2% versus 2022.
Our take: The risk-on rally continued, with lower-rated credit again leading the way. New-issue supply should pick up again after Q2 earnings reports. When combined with the potential for earnings disappointments and updated 2H guidance, which was probably overly optimistic when originally communicated in early 2023, these could be the series of events that grinds the rally to a halt. FedEx and Olin chemicals both reduced guidance this week. Taking selected prints, especially in lower-rated credit, and rotating into higher quality but longer duration credit seems prudent. Duration risk seems more prudent than credit risk given tight spreads and overall complacency.
Economic Commentary
- Sentiment and positioning have turned outright bullish as both retail and institutional investor sentiment has reached its highest levels in over 2 years and registered readings in the top quintile of the past several decades.
- Retail sales rose 0.3% in May, well above the consensus expectation for a 0.2% decline. Retail sales excluding autos and gas rose 0.4%, twice the 0.2% consensus.
- University of Michigan survey 1-year inflation expectations fell from 4.2% to 3.3%, well below the 4.1% expected, and 5-to-10-year expectations fell to 3.0%, in comforting signs that consumers don’t expect sticky or entrenched price increases.
- US housing starts surged 21.7% in May, the most since 2016. Single family starts rose 18.5% to an 11-month high. Building permits rose a more modest 5.2%.
Our take: Mixed signals on the economy, which are normal at inflection points. The Fed will keep talking tough, including this week during congressional testimony, and right up until the point when they are convinced the job is done and they are ready to end, not pause, the rate hike cycle. Anything premature would allow a potential re-acceleration of inflation and unwelcome stirring of animal spirits. We believe they will hike in July, but September is a long way away and by then more evidence of a slowing economy should obviate the need for another hike.
Municipal Bond Market Commentary
- For the week ending June 16, 2023, looking at the data in the 2, 5, 10-year maturities, high grade tax-exempt bonds outperformed US Treasuries across the curve by 13, 9, and 4 bps, and underperformed in 30 years by 2 bp.
- Ratios were lower in the 2-, 5-, and 10-year maturities and unchanged for the 30-year, with AAA Muni/Treasury ratios ended the week at 65%, 66%, 68% and 93%. The AA Muni/AA Corporate ratio finished the week at 63%, 60%, 62%, and 80% respectively.
- For the period ending June 14, tax-exempt funds reported outflows of $257 million.
- The new issue municipal calendar for the week is below average at $5.95 billion.
Our take: With the inflation data and FOMC meeting dominating all fixed income markets last week, municipal bond trading seemed muted, never moving as much as might have been expected on any given day as US Treasuries had a much more volatile week, ending the week with higher 2-through 10-year yields and 30-year yields slightly lower. The high-grade municipal curve was very sticky, never moving much but finishing 1-2 bps lower across the curve. Our near-term outlook for the summer months is unchanged, as new issuance is expected to pick up but be well short of reinvestment dollars from called and matured bonds, providing strong support for continued richness in municipal bonds. The current visible net supply is -$27.3 billion.
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