Weekly Fixed Income Commentary (June 20, 2024)
Economic Commentary
- Retail sales surprised to the downside across all categories, and spending levels were even weaker when taking downward April revisions into consideration.
Headline retail sales rose 0.1% in May, missing expectations of 0.3% by two tenths, after a downwardly revised 0.2% April decline. Retail sales ex-autos fell 0.1%, falling short of the consensus expectation for a 0.2% increase. Sales ex-autos and gas rose 0.1%, three tenths below the 0.4% consensus. Control-group sales, which feed directly into GDP calculations, rose 0.4% in May, but April’s 0.3% decline was revised lower to -0.5%. - The CBO updated its budget forecasts for the next ten years, estimating a $1.9 trillion deficit for the 2024 fiscal year, up from $1.6 trillion in its previous report. These estimates also assume the 2017 Tax Cuts and Jobs Act is not renewed, an unlikely outcome.
- Initial jobless claims declined slightly from the prior week, from a revised 243k to 238k, while continuing claims rose slightly, from a revised 1813k to 1828k.
Our take: The soft retail sales report adds to the uncertainty surrounding a slowing economy. Consumers have propped-up the economy for a long time, and if the weakness in the lower end of the economy starts to spread upwards to the middle-income cohort, those concerns will intensify. The job market is at full-employment type levels, but fiscal stimulus is waning, savings have been depleted, and continuous inflation has sapped purchasing power. This will dictate the range on USTs in the next few months, and growing weakness would also be a catalyst for the Fed to consider earlier rate cuts. High quality duration is a compelling allocation, but we have modestly increased credit hedges in case things deteriorate more rapidly.
Corporate Bond Market Commentary
- IG spreads widened 5bp to +95, however significantly lower UST rates pushed total returns +1.20%
- IG inflows were $1.383 billion
- New issue IG supply was under $6 billion, the lightest week since March 2023.
- HY spreads widened 14b to +329 and total returns eked out a +0.28%.
- High yield inflows were $189 million.
- Approximately $2.4 billion of high yield bonds priced.
Our take: Pension funding status for the largest 100 corporate plans reached 103.4%, the highest level since November 2022. This should further support rotation into high quality bonds, albeit not as heavy at the long end of the curve given the shortening of benefit payment schedules. Overall, we continue to position up in quality with IG and strong BB corporate bonds – paired with select lower-rated credits where we see strong fundamental value, and event-driven positions where the wide-open capital markets facilitate catalysts.
Municipal Bond Market Commentary
- The week ending June 14 saw US Treasury and Muni yields move lower primarily on the weaker than expected CPI data and no surprises coming out of the FOMC meeting. AAA muni yields were down 12, 11, 12 and 10 bps at 2, 5, 10, and 30 years. The AAA municipal bond curve underperformed the US Treasuries, where yields fell 18, 22, 21, and 21 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were flat at 2 years and rose 1% at 5, 10, and 30 years, to end the week at 66%, 68%, 67% and 86% respectively. AA Muni/AA Corporate ratios were down 1% at 2 years, flat at 5 and 10 years, and rose 2% at 30 years, ending the week at 64%, 64%, 62% and 79% at 2, 5, 10 and 30 years.
- For the weekly period ending June 12, Lipper reported municipal bond outflows of $105 million from open end funds and inflows of $259 million to ETFs.
- The muni new issue calendar is expected to be around $8.6 billion this week.
Our take: The US Treasury and muni market yields continue to be at the low end of the recent trading range, but still appear to be range bound. As we stated last week, the economic calendar is light the next couple of weeks, with the next major numbers being GDP and PCE at month end, so it’s likely that market technicals and Fed speakers will be the primary short-term drivers of market direction.
Important Information
Investors should consider a fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about a fund. To obtain a prospectus, visit www.sheltoncap.com or call (800) 955-9988. A prospectus should be read carefully before investing.
It is possible to lose money by investing in a fund. Past performance does not guarantee future results. Any projections or other forward-looking statements regarding future events or performance of markets, companies, or otherwise are not necessarily indicative or differ from, actual events or results.
INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.
