Weekly Fixed Income Commentary (November 22, 2023)
Economic Commentary
- US CPI came in at 0.0% m/m on the headline and 0.2% m/m for the core, both ~0.1% lower than consensus. The beat was also pretty broad based; we saw most categories, including the all-important housing related categories, slow pretty meaningfully. That bodes well for cooling in future months as well.
- Retail sales came in a bit better than expected, with the headline -0.1% m/m and the “control group” up +0.2% m/m.
- October existing home sales fell 4.1% to 3.79 million, well below the consensus of 3.90 million. This is the fifth straight fall in existing home sales, and the largest drop in the sequence, leaving sales at their lowest level since August 2010.
- FOMC minutes revealed little about future direction of policy or rates. Members were unified in their communication that they will remain data dependent, and that they believe rates will need to remain high and restrictive for a considerable amount of time. We fully expect them to continue to echo this sentiment and try to keep financial conditions tight, right up until the moment they actually cut rates.
- The University of Michigan 1 year and 5-10 year inflation expectations were both 0.1% above consensus expectations, at 4.5% and 3.2% respectively.
Our take: Economic data continues to paint a picture of generally slowing economic activity, but not for every data release of every category. We are in a transition period, and data will be messy and confusing until things slow considerably more and the data becomes more uniformly negative. Rates have come down substantially over the last several weeks, and a breather in this neighborhood seems likely until we get further confirmation of the slowing trend. Any backup in rates would be an opportunity to add more duration to FI portfolios.
Corporate Bond Market Commentary
- US High Yield tightened 4 bp last week to an OAS of +399 bp. On a total return basis, US HY climbed +0.9% on outperformance from CCCs (+1.0%) versus Bs (+0.9%) and BBs (+0.9%). On a YTD basis, US HY is now +7.9% with CCCs (+12%) still leading Bs (+8.6%) and BBs (+6.4%).
- US HY primary markets remained active with roughly $6 billion of total volume, bringing the MTD total to almost $17 billion. YTD volume in US HY now totals ~$160 billion.
- Fund inflows were $2.8 billion.
- IG spreads were 6bp tighter to +120bp. Total returns were +1.65%.
- The primary market met projections with $26 billion new issues priced. Fund outflows were $368 million.
Our take: After continued strong performance last week, bond markets are taking a respite during the quiet holiday week. Economic data is supportive of the current range on yields and spreads, driving positive fund flows into the performance -> inflows -> performance feedback loop. Recent corporate earnings and management commentaries suggest cooling demand and waning pricing power across many industries, which supports our view for up in quality positioning at this point in the cycle.
Municipal Bond Market Commentary
- For the week ending November 17, high grade tax-exempt municipal bonds yields fell in a nearly parallel shift, falling 21, 21, 22 and 18 bps at 2, 5, 10 and 30 years, nearly matching US Treasuries where yields fell by 18, 24, 22, and 17 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios fell 1 to 2 percent at 2, 5, 10, and 30 years, ending the week at 65%, 67%, 69% and 89%. AA Muni/AA Corporate ratios fell 3 percent across the curve to end the week at 63%, 62%, 62% and 80% respectively.
- For the period ending November 8, municipal bond funds reported outflows of $235 million
- The new issue muni calendar is very light this week due to the Thanksgiving holiday, estimated to be $340 million.
Our take: We maintain that this is an opportune time to invest in high grade municipals as after-tax yields remain elevated, the Fed appears to be done hiking, and predictions are for negative net supply in December. That said, muni ratios have become richer in the last couple of weeks and it is likely that ratios revert and municipals underperform US Treasuries in the short term unless fund flows reverse direction.
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