Weekly Fixed Income Commentary (May 16, 2024)
Economic Commentary
- April core CPI increased +0.3%, in line with the consensus expectation and a welcome improvement after three consecutive months of +0.4% monthly increases. The headline index also rose +0.3%, versus the consensus expectation for a +0.4% gain. There was broad moderation, suggesting at first glance that some of the concerning flare-ups we saw in data earlier this year were not representative nor going to persist in upcoming months.
- PPI rose +0.5%, well above consensus of +0.2%, but March was revised lower from +0.2% to -0.1%, putting the year-over-year figure at +2.2%.
- April retail spending data certainly helped support the bond market rally. Headline spending was flat, versus a consensus expectation for a +0.4% increase, while the control group fell -0.3% versus an expectation for a +0.1% gain. Along with downward revisions to the March data, the report gave investors another source of cautious optimism that the economy is not overheating.
- University of Michigan 1-year and 5–10-year inflation expectations rose from 3.2% to 3.5% and from 3.0% to 3.1% respectively. The 1-year is heavily influenced by gasoline prices; the 5-10-year is worth paying close attention to.
Our take: Inflation readings were lower than in March and – for the first time all year – did not exceed the consensus forecast but were not low enough to be consistent with a convincing path toward 2%. The decline in the year-on-year core rate looks great, but likely has no more than one more month to run because after May, the year-ago changes will be small, meaning the base effects will no longer contribute to a declining rate. Furthermore, the Supercore CPI is actually rising, pushing from +4.77% to +4.88% and again faces problematic base effects in the months ahead. All of these conflicting signals – some weaker data points mixed with pockets of persistent or even rising inflation, should keep the Fed on hold longer, but they seem to be so intent on cutting rates they may do it anyway, even if the data suggest it is premature.
Corporate Bond Market Commentary
- IG spreads were unchanged at +89bp and total returns were +0.09%.
- $55.9 billion of deals priced. Order books were 4.1x oversubscribed versus 5.8x the previous week, but NICs were still minimal at 1bp.
- Fund flows were +$764 million.
- US HY widened 4bp to +312 and total returns were +0.02%.
- The primary market was active with twenty issuers pricing $13.75 billion.
- Fund flows were strong at +$3.033 billion.
Our take: Corporate bond market performance was muted, as stable interest rates and heavy new issuance kept a lid on returns. With most companies through earnings blackouts and markets wide-open, expect supply to remain robust over the coming weeks before the summer slowdown kicks in. The song remains the same – spreads are tight but all-in yields are still attractive, but if the economy starts to slow we are prepared to tactically move portfolios more up in quality and add more duration.
Municipal Bond Market Commentary
- The week ending May 10 was very light on economic data, but the AAA tax-exempt municipal bond curve moved a little lower with yields falling 7, 6, 7, and 7 bps at 2, 5, 10 and 30 years, outperforming US Treasuries across the curve. US Treasury yields were up 5 and 1 bps at 2 and 5 years and down 1 and 3 bps at 10 and 30 years.
- AAA Muni/Treasury ratios were down 1-2% across the curve, ending the week at 64%, 59%, 59% and 83% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios were down 3% at 2 years, down 2% at 5 and 10 years and down 1% at 30 years to end the week at 63%, 58%, 56% and 75% at 2, 5, 10 and 30 years.
- For the weekly period ending May 8, municipal bond open end funds reported inflows of $131 million and ETFs reported inflows of $922 million.
- The muni new issue calendar is expected to be around $12.3 billion this week.
Our take: The rising rate trend in place since YE 2023 seems to have been broken; it seems likely that the market will find a channel and trade in a range until we see some clear trends in economic and inflation data. The muni market will likely continue to follow the US Treasury market over the near term, which is in turn closely watching economic releases and listening to Fed speakers. Having digested this week’s CPI and PPI data, next week’s economic release calendar is light, with the FOMC minutes and Fed Speakers being the primary focus. 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. The market, supported by fund inflows, has held up well in spite of several issuance calendars over $10 billion in recent weeks.
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