Weekly Fixed Income Commentary (May 22, 2024)
Economic Commentary
- Recent Fed speaker comments show little hurry to cut rates, given that inflation data has not shown enough progress and also that the economy is strong enough to bear high rates.
- Raphael Bostic said ‘We do a lot of talking to business leaders, and what they’re all telling us is that things are slowing down. But the slowdown is at a glacial pace.’
- Minutes from the May FOMC meeting reveal concerns over financial conditions being too easy and inflation progress being too slow. Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.
- UK CPI came in hotter than expected at 3.9%, a deceleration from 4.2% previously but above expectations of 3.6%. There is also chatter overseas that rate cuts could be delayed, as the probability of a June cut went from 50/50 to 15%.
Our take: This week has been quiet in terms of economic data releases, but don’t let that lull you into complacency. Implied volatility for options on UST futures has declined to levels suggesting just that. A few mixed or backsliding data points, especially into the post Memorial Day summer doldrums, would change that in a hurry.
Corporate Bond Market Commentary
- IG spreads were unchanged on the week at +89bp, while lower UST rates drove total returns in IG to +0.65%.
- $28.1 billion of new issues priced across 21 borrowers. Order books averaged 3.0x, lower than recent averages, while NICs of 3.8bps were in line with recent trends.
- Fund outflows were -$940 million.
- HY tightened 3bp to +309bp and total returns were +0.41%.
- $4.55 billion of new deals priced, down from $14.05 billion the prior week.
- Fund inflows were a robust +$2.6 billion.
Our take: Another solid week in corporate bonds, despite heavy new issue supply. This week is again seeing large new issue calendars, front loaded before the Memorial Day long weekend. It is well documented that spreads are tight, with the counterbalance that all-in yields are relatively higher and perceived as attractive. This holds true if the economy remains within a range of not too hot and not too cold. If growth and inflation re-accelerate, rate cuts will be delayed further and hikes might come back into play, wreaking havoc on rate-sensitive bonds again. If the downturn is harder, yes rate cuts will come sooner but spreads will likely blow-out and dispersion will increase. The strategy to navigate these risks and opportunities is up in quality, with rate hedges to protect against a spike, and prudent credit selection in lower rated credits where downside protection will be crucial.
Municipal Bond Market Commentary
- The week ending May 17 was focused on the PPI and CPI data, which left US Treasuries a little lower across the curve, 4, 7, 8, and 8 bps lower at 2, 5, 10, and 30 years. The AAA tax-exempt municipal bond curve, digesting another large issuance calendar, underperformed US Treasuries with yields flat at 2 years, up 2 bps at 5 and 10 years and down 1 bp at 30 years.
- AAA Muni/Treasury ratios rose 1-2% across the curve, ending the week at 65%, 61%, 60% and 84% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios also rose, 1% at 2 years, 3% at 5 and 10 years and flat at 30 years to end the week at 64%, 61%, 59% and 75% at 2, 5, 10 and 30 years.
- For the weekly period ending May 15, municipal bond open end funds reported outflows of $639 million and ETFs reported inflows of $91 million.
- The muni new issue calendar is expected to be around $12.8 billion this week, the fourth week in the past five with over $10 billion in new issuance.
Our take: It seems likely that the market will trade in a range until we see some clear month-over-month trends in economic and inflation data. Absent any big data releases this week the Treasury and muni markets will be focused on Fed speakers and market supply technicals. Municipal bonds remain rich relative to US Treasuries but though they’ve held up well, there is definitely upward pressure on US Treasury/AAA muni ratios due to the large recent increase in issuance.
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