Weekly Fixed Income Commentary (May 9, 2024)
Economic Commentary
- Nonfarm job growth slowed in April, and with a modest downward revision to prior months’ growth, was about 100k under the 240k consensus. Payrolls grew 175k in April, were revised up 12k from 303k to 315k in March and down 34k to 236k in February.
- YoY earnings growth slowed from +4.2% to +3.9%, under 4% for the first time since 2021. The unemployment rate rose from 3.829% to 3.865%.
- The Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) reported further credit tightening.
- The Citi Economic Surprise Index has rolled over fairly hard and has now gone negative to -11.5.
Our take: This week, there was not much data released. The University of Michigan sentiment survey on Friday is the highlight. Hence, even if the data are going to reaccelerate, it will be at least another week before we see any evidence. Regarding last week’s jobs report, it was probably not as soft as it appeared on the surface. Very often, seasonal hiring in construction, leisure & hospitality and retail plays havoc with seasonal adjustment in the spring, because workers are added when the weather dictates, while seasonal adjustments are based on past years’ patterns. In this case, some March hiring appears to have detracted from April, as hiring in seasonal industries, including leisure and hospitality and construction, was unusually strong in March, lifting the headline payroll rise above 300k. Perhaps we will look back on this report as being the inflection in the labor market, or maybe it’s another head fake. The Fed will want to be certain before again prematurely allowing looser financial conditions, so it will take a few more months of slower readings to confirm this trend. While there are signs the labor market is starting to come into better balance, that does not mean it will go from a healthier balance rapidly into layoffs and much slower wage growth. After all, the Employment Cost Index just printed +1.2%, or 4.2% year-over-year, the highest reading in over a year.
Corporate Bond Market Commentary
- IG spreads tightened 1bp to +89bp and total returns were +1.26%.
- Primary markets priced $19 billion last week. Average order books were 5.8x oversubscribed and average NICs were 5.7bps. May projections are $125 billion.
- Fund flows were +$245 million.
- HY spreads tightened 8bp to +308bp and total returns were +1.08% led by CCCs (+1.15%) BBs (+1.16%) and Bs (+1.01%).
- Issuers priced $3.35 billion of deals.
- Fund flows were a modest +$118 million of inflows.
Our take: A strong week of returns, most of which occurred after the FOMC meeting. Interest rates have declined from recent highs, but spreads remain at very tight levels. New issue supply is increasing, which will keep a bit of a lid on near-term performance. Corporate earnings commentary continues to highlight the struggles of the lower-end consumer and increasing resistance to further price increases. We know that the Fed necessarily has to slow the labor market and/or the overall economy to drive down the final stubborn amount of inflation, and this should squeeze corporate margins and earnings. Normally, bond performance would follow, so moving portfolios a bit more up-in-quality is prudent.
Municipal Bond Market Commentary
- For the week ending May 3, yields fell in response to Powell’s post FOMC comments and weaker than expected payroll numbers. AAA tax-exempt municipal bond yields fell 8, 7, 8, and 9 bps at 2, 5, 10 and 30 years, underperforming US Treasuries across the curve. US Treasury yields were down 18, 19, 16 and 11 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were up 1% at 5 years, otherwise unchanged, ending the week at 66%, 61%, 60% and 84% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios were up 1% at 2 years and down 1% at 30 years to end the week at 66%, 60%, 58% and 76% at 2, 5, 10 and 30 years.
- For the weekly period ending May 1, municipal bond open end funds reported inflows of $426 million and ETFs reported inflows of $89 million.
- The muni new issue calendar is expected to be around $12.4 billion this week.
Our take: The rising US Treasury and municipal bond yield trend abated, at least temporarily. Nothing has really changed in the big picture outlook – the muni market will likely continue follow the US Treasury market over the near term, which is in turn closely watching economic releases for indications of future levels of economic growth and inflation. Municipal bonds remain rich relative to US Treasuries and that looks likely to remain the case as most analysts are predicting favorable technical support for municipals over the Summer months.
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