Weekly Fixed Income Commentary (July 2, 2024)
Economic Commentary
- The PCE price index was flat month-over-month and up 2.6% year over year, while the Core PCE price index increased 0.1% month-over-month and 2.6% year-over-year. Both readings were lower than expected and show continued moderation of inflation readings.
- The University of Michigan 1 year inflation expectation decreased to 3.0% from 3.3%, and the 5–10-year expectation decreased from 3.1% to 3.0%. The Fed is keen to see inflation expectations such as these remaining well-anchored.
- ISM prices paid declined from 57.0 to 52.1, below expectations of 55.9.
- May job openings increased from a revised 7.919 million to 8.140 million in a slight step back from last month’s post-pandemic lows.
- Lumber prices have tumbled significantly, as high mortgage rates have dented demand for both new construction and repair & remodeling activity, an ominous sign for the near term prospects for an important segment of the economy.
Our take: Economic data continues to show signs of slowing, and anecdotal corporate commentaries are corroborating this trend. The Citi US Economic Surprise Index just hit its lowest level in almost two years. However, this is in contrast with the sharp move higher in US treasury yields, particularly at the long end, which is being fueled by pricing-in of possible fiscal and trade policies under Trump after last week’s debate. While it is important to understand how policy could change under a new administration, fundamental US economic data will win out over rhetoric or headlines, especially when some of these talking points would also need control of Congress in order to be enacted.
Corporate Bond Market Commentary
- HY spreads tightened 3bp to +318bp, while UST yields moved sharply higher, ekeing out a +0.02% total return.
- By ratings, year-to-date returns are now +2.44% for BBs, +2.58% for Bs, and +3.49% for CCCs.
- $3.36 billion of new issues priced.
- Fund outflows were -$677 million.
- IG spreads were unchanged at +96bp and total returns were -0.62%. Year-to-date returns are +0.03%.
- $32 billion of new issues priced.
- Fund flows were +$1.79 billion.
Our take: Another crossroads, where economic data is slowing yet interest rates are spiking. If the economy is indeed slowing, there is little impact that an election in November will be able to have to quickly turn things around. High quality fixed income is again going on sale just when it should be looking most attractive. We continue to position with high quality IG and BBs, select lower rated credits that have a path or catalyst for credit improvement, and certain event-driven trades which can be facilitated by the still wide-open credit markets.
Municipal Bond Market Commentary
- The week ending June 28 saw yields rising back to the middle of the recent trading range. AAA muni yields were up 4, 6, 5, and 3 bp at 2, 5, 10 and 30 years. The AAA municipal bond curve slightly underperformed US Treasuries at 2 years and outperformed at longer tenors. US Treasury yields rose 2, 10, 14, and 16 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were flat at 2 and 5 years, fell 1% at 10 years, and fell 3% at 30 years to end the week at 66%, 68%, 65% and 83% respectively. AA Muni/AA Corporate ratios were up 1% at 2 years, flat at 5 and 10 years, and fell 2% at 30 years to end the week at 64%, 64%, 62% and 76% at 2, 5, 10 and 30 years.
- For the weekly period ending June 26, Lipper reported municipal bond fund outflows of $477 million.
- The muni new issue calendar is very small due to the Independence Day holiday and is expected to be around $192 million this week.
Our take: The US Treasury and muni markets yields continue to be range bound. Last week’s major economic release was PCE which came in right at expectations. The monthly nonfarm payroll and unemployment numbers will be released this Friday. With one of the major summer holidays falling midweek many market participants will be on vacation and liquidity will be thin, so any news has the potential to cause an amplified move due to the relative lack of liquidity.
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