Weekly Fixed Income Commentary (March 21, 2024)
Economic Commentary
- February housing starts and permits came in above estimates. Starts of 1,521k were +6% yoy, with single-family starts +35% and multi-family starts -35%.
- The Empire Manufacturing index dropped -20.9, well below expectations of -7.0 and the prior month -2.4.
- The University of Michigan 1 year inflation expectations ticked up slightly to 3.1% from 3.0% last month, not surprising given the rise in gasoline prices. Long-term 5–10-year expectations held steady at 2.9%.
- The FOMC left rates unchanged, as expected. Revised dot plots continue to show 3 cuts in 2024 but removed 1 cut each from 2025 and 2026.
Our take: Chairman Powell did not push back against 3 rate cuts in 2024 but did continue to stress data dependency. If economic data moderates over the coming months and prove the January/February surge was a bump, June is a reasonable expectation for a cut and then a skip. However, if inflationary economic data does not moderate or, at least stabilize, then rate cuts could be postponed further. Given how easy the Fed has allowed financial conditions to become, it’s hard to have definitively high confidence inflation will moderate fast enough for a cut in June, and therefore aggressively adding duration to portfolios seems a bit premature. If 10yr rates break-out of their current trading range and reach ~4.5%, that would be a signal to do so.
Corporate Bond Market Commentary
- US HY tightened 10bp to +316bp but higher yields pushed returns down to -0.3% on underperformance from BBs (-0.4%) and Bs (-0.2%) versus CCCs (flat).
- Fund flows were +$66 million.
- US IG spreads tightened 6bp to +93 but yields rose 17bp, pushing total returns down to -0.97%.
- The IG market priced $37.1 billion across 23 issuers, ahead of the $35 billion expected. Demand remained strong as order books averaged 3.6x oversubscribed and NICs averaged 4.9bp.
- Fund flows into IG were +$1.323 billion.
Our take: Significant new issue supply continued to be easily digested as fund inflows and adequate cash balances need to be put to work. However, the pricing of new deals is pushing the envelope, leaving less room for outperformance in many cases. Overall performance is being muted by interest rates creeping higher. A combination of T-bills, high quality 5-10 year IG and BBs, and selective Bs/CCCs that will benefit from continued strong growth and wide-open capital markets, is our tactical allocation.
Municipal Bond Market Commentary
- For the week ending March 15, high grade tax-exempt municipal bond yields were 4 higher at 2 and 5 years and unchanged at 10 and 30 years, outperforming US Treasuries across the curve. US Treasury yields were up 25, 28, 24 and 18 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios fell at all tenors due to the muni market not selling off as much as US Treasuries, ending the week at 59%, 57%, 57% and 82% at 2, 5, 10 and 30 years. AA Muni/AA Corporate ratios were also lower across the curve to end the week at 59%, 55%, 53% and 75% respectively.
- For the period ending March 13, municipal bond open end funds reported inflows of $183 million while ETFs reported inflows of $113 million.
- The muni new issue calendar is expected to be larger this week at about $6.5 billion.
Our take: US Treasury and municipal bond yields remained range-bound. Neither the strong CPI and PPI, weak retail sales, or the Fed’s revised Summary of Economic Projections have moved the market out of the trading range. Market participants continue to watch economic data and Fed speakers for a catalyst to move the US Treasury curve out of the current range. Positive net supply and fund flows continue to support the rich relative value of municipal bonds to US Treasuries.
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