Weekly Fixed Income Commentary (March 14, 2024)
Economic Commentary
- Core CPI increased 0.4% for the second consecutive month in February, taking almost all analysts by surprise. However, there are some optimistic ways to view yesterday’s report. The 0.4% increase was rounded up from 0.358%, only slightly off from being rounded down to 0.3%. The 0.6% increase in January’s OER (Owners’ Equivalent Rent) index downshifted to 0.4%, an encouraging sign that the new weighting methodology from the BLS is not going to accelerate shelter inflation for the foreseeable future. Core services prices excluding shelter slowed from a 0.9% increase in January to 0.5% in February.
- The headline PPI rose 0.6%, double the 0.3% consensus, mostly due to higher energy and transportation prices. The core PPI, ex-food, energy, and trade services,rose 0.4%. Year-over-year PPI data was higher than expected, but both headline and core are below 2%.
- Retail sales rose 0.6%, just two-tenths shy of the consensus, while sales excluding cars and gasoline were on the consensus with a 0.3% rise. But the retail sales control group, the part feeding into GDP, was unchanged, well below the 0.4% consensus forecast.
- Nonfarm payrolls rose 275k in February. December was revised down 43k from 333k to 290k and January down 124k from 353k to 229k, a net revision of -167k.
- Average hourly earnings rose just 0.1% to $34.57 an hour, even less than the already modest 0.2% consensus. The February rise should be considered alongside the 0.5% rise in January, which was affected by weather that kept more low-paid workers from their jobs than high-paid workers. The average increase in the two months was 0.3%, the same as in thee of the four prior months. On a year-on-year basis, average hourly earnings dropped from 4.4% to 4.3%, where it was in all three months of the fourth quarter.
Our take: Recent CPI, PPI, and employment data suggest inflation remains persistent while broader economic activity is a mixed bag but not necessarily stagflation (yet). Interest rates have begun rising again over the last several days, and markets are now pricing-in only 3 cuts in 2024. This was one of the indicators we have been looking for to start to contemplate adding more duration to our portfolios. Based on recent commentary from certain FOMC governors, it wouldn’t be surprising for the updated dot plots next week to show a median of 2 cuts rather than 3. As Janet Yellen said this morning, rates are unlikely to reach the very low pre-pandemic levels any time soon.
Corporate Bond Market Commentary
- US High Yield tightened 6 bp last week to an OAS of 326 bp. On a total return basis, US HY rose +0.6% on a third consecutive week of outperformance from CCCs (+0.7%) versus Bs (+0.5%) and BBs (+0.6%). On a YTD basis, US HY is +1.1% with CCCs (+3%) leading Bs (+1.2%) and BBs (+0.6%).
- US HY primary markets were active last week with almost $8 billion of total volume. YTD issuance now totals ~$66 billion.
- HY fund flows were +$1.082 billion, reversing the prior week’s outflow.
- IG spreads tightened 2bp and yields declined 12bp, pushing total returns to +0.86%.
- New issuance was $51.5 billion, well above the $35 billion expected and topping $50 billion for a third consecutive week. 33 issuers brought deals, order books averaged 3.5x oversubscribed, and NIC averaged 5.9bp, higher than recent trends.
- IG fund flows were +$4.141 billion.
Our take: Corporate bond markets continue to show resiliency in the face of a massive amount of new supply. However, many of these deals are not performing as well on the break, an indication that the strength may be fading a bit. The exception is in the lowest-rated portion of the market, where single B and CCC new issues are still trading up 1-2 points regularly. Participating in new issues allows actively managed funds to enhance returns, and we are riding the wave.
Municipal Bond Market Commentary
- For the week ending March 8, high grade tax-exempt municipal bonds yields were 4, 6, 7 and 5 bps lower at 2, 5, 10, and 30 years, lagging US Treasuries across the curve. US Treasury yields were down 6, 11, 10 and 7 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were unchanged other than at 30 years where they were 1% higher, ending the week at 62%, 59%, 60% and 86% at 2, 5, 10 and 30 years. AA Muni/AA Corporate ratios were unchanged across the curve to end the week at 60%, 56%, 54% and 76% respectively.
- For the period ending March 6, municipal bond open end funds reported inflows of $751 million, while ETFs reported inflows of $118 million.
- The muni new issue calendar is expected to be larger this week at about $12.2 billion this week.
Our take: US Treasury and municipal bond yields remained range bound. Neither monthly nonfarm payrolls nor Chairman Powell’s Humphrey-Hawkins testimony was able to significantly move yields. Market participants continue to watch economic data and Fed commentary for catalysts to move the US Treasury curve. This week’s CPI data and PCE (the Fed’s preferred measure of inflation) on March 29th will be closely watched, as will the Fed’s Summary of Economic Projections which will be updated at their next meeting on March 20. Positive net supply and fund flows continue to support the rich relative value of municipal bonds to US Treasuries.
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