Weekly Fixed Income Commentary (April 11, 2024)
Economic Commentary
- The NY Fed’s inflation survey reported 3.00% year-ahead inflation expectations, roughly the same as in the past three months.
- The NFIB small business optimism index dropped for a third consecutive month in March to its lowest since 2012. The biggest deterioration was in sales expectations and diminishing expectations of easier credit conditions.
- Headline payrolls came in at 303k versus consensus looking for 214k. The unemployment rate ticked back down to 3.8%, even with labor force participation rising. Average hourly earnings reaccelerated from +0.2% last month to +0.3%, for a 4.1% year-over-year gain. Aggregate hours worked rose 0.5% in March and a 5.2% annual rate in the first quarter, consistent with strong GDP growth.
- The Citi Economic Surprise Index is reaccelerating
- CPI came in at +0.4% both headline and core, a tenth higher than expected. Only 1 out of 75 economists in the Bloomberg Economics survey had +0.4% for core. The notion that January and February were bumps or anomalies is looking more suspicious by the day.
- PPI rose 0.2%, a tenth below expectations of 0.3%, and the core PPI rose 0.2%, down from 0.3% in February. While both were slightly lower than expected, they are now running above the Fed’s 2% inflation target.
Our take: We have been skeptical that the January & February data were simply bumps or anomalies. The Fed erred in allowing financial conditions to ease substantially, and above trend growth and a stalling-out of inflation progress or reacceleration is the resulting outcome. Now the Fed will have to allow market rates to drift higher, talk tougher, remove near-term rate cut expectations, and possibly even threaten another hike to try and put this genie back in the bottle. Now that markets are pricing in fewer than 2 cuts in 2024, adding duration is becoming more appealing. Once the technical factors from this move flush-out positioning, start to selectively add higher-quality duration.
Corporate Bond Market Commentary
- HY spreads widened 6bp to +318 and total returns were -0.47%. BBs (-0.4%) and Bs (-0.4%) outperformed CCCs (-0.9%).
- New issue supply was $7 billion.
- Fund flows were -$672 million.
- IG spreads tightened 1bp to +92bp but rising UST yields drove total returns -1.01%.
- New issue IG supply was $24 billion, slightly ahead of $20 billion expected. Order books were 3.7x oversubscribed and NICs averaged 4.1bp.
- Fund flows were +$1.23 billion.
Our take: Last week’s orderly declines have given way to a more disorderly selloff this week after the CPI release. ETFs will see further outflows and bonds will have to get sold, adding to the downward pressure. Our purposefully higher cash position and shopping list have us prepared to selectively start stepping into bonds on this weakness.
Municipal Bond Market Commentary
- For the week ending April 5, AAA tax-exempt municipal bond yields were 14, 13,12, and 13 bps higher at 2, 5, 10 and 30 years, underperforming US Treasuries slightly at 2 years and outperforming beyond 2 years. US Treasury yields were up 13, 18, 20 and 21 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were 1% higher at 2 years, unchanged at 5 and 10 years and 1% lower at 30 years, ending the week at 66%, 60%, 60% and 85% at 2, 5, 10 and 30 years. AA Muni/AA Corporate ratios were 1% higher at 2 and 5 years, unchanged at 10 years and 2% lower at 30 years to end the week at 66%, 59%, 56% and 77% respectively.
- For the period ending April 3, municipal bond open end funds reported inflows of $470 million while ETFs reported outflows of $390 million.
- The muni new issue calendar is expected to be $8.86 billion this week.
Our take: US Treasury and municipal bond yields broke out of their recent range to higher yields based on strong PCE deflator and nonfarm payroll numbers reported last week and are moving higher again based on the stronger than expected CPI numbers. The timeline for Federal Reserve to begin cutting Fed Funds rates has been pushed out substantially and the market is now expecting a 25 bp cut at the September FOMC meeting to be the only rate cut of 2024. Positive fund flows continue to support the rich relative value of municipal bonds to US Treasuries.
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