Weekly Fixed Income Commentary (July 25, 2024)
Economic Commentary
- New home sales decreased -7.4% year-over-year in June, following a -16.2% decline in May. Existing home sales fell -5.4%.
- Housing starts decreased -4.4% in June following a -17% decrease in May. The housing market is in the doldrums, which has a negative multiplier effect on the economy.
- Bill Dudley, former NY Fed President and a strong supporter of higher-for-longer rates, is now calling for a rate cut NEXT WEEK, citing a slowing economy, weak labor market, and the approaching trigger point of the Sahm Rule, something we cited weeks ago here. “The facts have changed, so I’ve changed my mind”.
- Q2 real GDP rose 2.8%, ahead of expectations but in line with Atlanta Fed GDPNow model. The strength was driven by personal consumption, government spending and business fixed investment. This personal consumption is being fueled by the drawdown in personal savings – we’ll see if this is last-gasp type behavior or if there is still room to run fueled by the wealth effect and home price appreciation.
- The Core PCE deflator rose 2.9%, which portends a possible stronger than expected June core PCE report and would potentially give the Fed pause in teeing-up a September cut.
- Joe Biden dropped out of the race for President, and support has coalesced around Kamala Harris, creating more uncertainty over the coming weeks and months leading up to the November election.
Our take: Some conflicting data recently, after what had been a run of relatively weak data, complicates the picture a bit for next week’s FOMC meeting. The market is pricing a 6.5% probability of a cut next week and 100% probability of a cut in September, with cumulative cuts of 66bps in 2024. Anything other than the Fed using next week’s meeting to tee-up a cut in September would be a disappointment, with the impact more pronounced on the front-end of the yield curve.
Corporate Bond Market Commentary
- HY spreads tightened 10bps to +309 and total returns were +0.30%.
- Single-Bs closed at +259, the lowest since June 2007.
- HY funds saw strong inflows of $2.524 billion.
- $3 billion of new issuance priced.
- IG spreads widened 1bp to +93bp and total returns were -0.35%.
- Inflows into IG funds were a robust $2.642 billion.
- $44.5 billion of new issuance priced last week.
Our take: High yield bonds continued their streak of 8 weeks in a row of positive returns. Solid fund inflows, a light new issue calendar, and moderating UST yields have combined to produce a strong technical backdrop for performance. Further gains will likely need a solid earnings season and continued positive fund flows, especially as we head into August when trading volumes are lighter and dealers less inclined to provide liquidity.
Municipal Bond Market Commentary
- The week ending July 19 saw US Treasuries and municipals go in opposite directions, with US Treasury yields higher and muni yields slightly lower across the curve. AAA muni yields were down 3, 2, 1 and 2 bps at 2, 5, 10 and 30 years. The AAA municipal bond curve outperformed US Treasuries, with US Treasury yields rising 6, 6, 6, and 5 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios fell 2% at 2 years and 1% at 5, 10 and 30 years to end the week at 64%, 68%, 66% and 84%. AA Muni/AA Corporate ratios followed the exact same pattern to end the week at 61%, 64%, 62% and 77% at 2, 5, 10 and 30 years.
- For the week ending July 17 municipal bond funds had inflows of $891 million.
- The muni new issue calendar is expected to be around $11.9 billion.
Our take: It was a relatively slow week for news and the market followed suit with the 10 year Treasury yield staying within a 10 bp range for the week. We’re now in the FOMC quiet period with the market predicting a 100% chance of a Fed Funds rate cut by the September meeting. Fixed income markets are focused on the monthly PCE numbers, the Fed’s preferred indicator of inflation, which will be released this Friday.
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