Weekly Fixed Income Commentary (March 28, 2024)
Economic Commentary
- The tragic collapse of the Francis Scott Key bridge in Baltimore will have a modest impact on inflation generally, but in the specific areas of imported cars, farm & construction equipment, and forest products, the impact will be more meaningful due to the port’s significant market share in these areas. In particular, roll on/roll off cargo like agricultural equipment will be impacted at the busiest time of year, ahead of spring planting season in the Midwest.
- Durable goods orders rose 1.4% in January, above the 1.0% consensus forecast. Orders ex-transportation rose 0.5%, a tenth above the 0.4% consensus. Nondefense capital goods orders ex-aircraft rose 0.7%, well above the 0.1% consensus.
- Yesterday’s durable goods report shaved another tenth off of the Atlanta Fed’s GDPNow estimate, which is now tracking +2.1% for Q1.
- Investors are left to close out their monthly and quarterly positions without seeing Friday’s PCE data as markets are all closed for the holiday. Market pricing is tied to expectations for a 0.3% increase in February core PCE deflator and the monetary policy implications that go along with it. This sets up the potential for a choppy trading session on Monday if Friday’s data give any big surprises.
Our take: A very light period of economic data coupled with quieter trading in a holiday-shortened week had US Treasuries generally sideways within a range. Look for more meaningful economic releases in coming weeks, beginning with Good Friday’s PCE data, to either reinforce the case for a June/July first cut, or push that timing further out. We continue to believe financial conditions are too loose, which when combined with the resurgence in oil, gasoline, and other commodities, will make the path to lower inflation slower and bumpier.
Corporate Bond Market Commentary
- IG spreads tightened 1bp to +92bp, while yields fell 13bp, driving weekly total return gains of +0.81%.
- IG new issue supply was $27.75 billion across 18 issuers. Order books averaged 4.8x oversubscribed, but new issue concessions were only 2bp.
- Fund flows were -$1.32 billion.
- HY spreads tightened 8bp to +308 and total returns were +0.65% on outperformance of BBs (+0.87%) and Bs (+0.56%) versus CCCs (+0.18%).
- HY new issue priced $5 billion. Year to date is above $84 billion, up 116% versus last year.
- Fund flows were -$1.684 billion.
Our take: New issue supply continued unabated last week as ample fund flows and cash positions are available to digest it. Pricing of new deals continues to get more aggressive, leaving less room for outperformance. The quality mix of HY borrowers continues to skew lower, as markets are wide open for almost all borrowers. This is allowing companies to clean-up not just 2024 maturities but reaching into 2025 and 2026 in many cases as well, albeit at higher all-in rates in many cases. We continue to be selective and opportunistic participants in primary deals where it makes sense, while also seeking opportunities for issuers who can take advantage of the wide-open market access while the music is still playing.
Municipal Bond Market Commentary
- For the week ending March 22, AAA tax-exempt municipal bond yields were 8, 3,3, and 4 bps higher at 2, 5, 10 and 30 years, underperforming US Treasuries across the curve. US Treasury yields were down 14, 14, 11 and 5 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were higher at all tenors due to the muni market not participating in the small US Treasury rally, ending the week at 63%, 59%, 59% and 84% at 2, 5, 10 and 30 years. AA Muni/AA Corporate ratios were also higher across the curve to end the week at 63%, 57%, 55% and 77% respectively.
- For the period ending March 20, municipal bond open end funds reported inflows of $96 million while ETFs reported outflows of $32 million.
- The muni new issue calendar is expected to be about $9.6 billion this week.
Our take: US Treasury and municipal bond yields remained range-bound. Market participants continue to watch economic data and Fed speakers for a catalyst to move the US Treasury curve out of the current range. The markets are currently focused on the upcoming PCE data that will be released when the markets are closed for a holiday on Good Friday. Positive net supply and fund flows continue to support the rich relative value of municipal bonds to US Treasuries.
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