Weekly Fixed Income Commentary (September 12, 2024)
Economic Commentary
- CPI came in above expectations with a +0.3% MoM increase versus the +0.2% estimate, while the YoY reading of +3.2% was in-line with both expectations and with July. Shelter costs continue to be a headwind, with a +0.5% rise MoM and the second consecutive rise in shelter costs, continuing to defy expectations that housing costs would be moderating by now. Core goods continued to show declines, falling -0.3% MoM and -1.9% YoY, led by deflation in transportation, used vehicles, household furnishings, and medical care commodities.
- PPI rose more than expected in August, but the July reading was revised lower, so net-net the report was in-line with expectations. Year-over-year increases of 1.7% headline and 2.4% core continue to remain range-bound. Although the declines have stalled-out, these figures are back to a range where they were in 2018-2019, when consumer inflation was around 2%.
- The New York Fed’s Survey of Consumer Expectations said 13.6% of respondents did not expect to be able to make a minimum debt payment sometime over the next three months, the highest percentage since April 2020.
- The NFIB small business optimism index fell from 93.7 to 91.2, the biggest drop in 2 years, driven by a large 9 point drop in the expected sales index.
Our take: The higher-than-expected CPI reading should solidify a 25bp rate cut next week and take a larger 50bp cut off the table. We will also get updated dot plots, which may be more impactful in terms of insight into the future path of interest rates. We are at an inflection point in the cycle, where certain data points are indicating a slowing economy, while others are not there yet. Interest rates may remain range-bound until more evidence appears as to the severity of the slowdown. This morning on their earnings call, Kroger indicated that what had begun as struggles with their lower-end consumers has begun to spread to other customers, who are making changes to their purchasing habits. This may be one of the better real-time indicators on consumer spending, given they are the largest traditional food retailer in the United States with over $150 billion of sales. We still believe up in quality/out in duration is the proper positioning at this point in the cycle.
Corporate Bond Market Commentary
- IG spreads widened 4bp to +99bp, but lower UST yields drove total returns +1.24%.
- New issue supply was $80.6 billion across 59 borrowers, the 5th largest week on record, and the highest outside of 4 weeks amid the pandemic-fueled bond binge of 2020. Concessions were 4bps, slightly higher than the 3.7bp year to date average, and deals were 3.5x oversubscribed, slightly lower than the 3.8x average.
- Fund inflows into IG were $2.795 billion.
- HY spreads widened 26bp to +339bp and total returns were +0.26% driven by CCCs (+1.37%) while BBs (+0.10%) and Bs (+.09%) lagged.
- Fund inflows were $581 million.
- New issuance was $7.615 billion.
Our take: New bond issuance is surging in September, as expected. This provides fertile opportunities to participate in deals, trade around them, and capture additional returns. Positioning up in quality remains prudent, as more and more companies signal challenged consumers and report softer sales. Dispersion is starting to increase again, where company-specific problems arise in a more difficult environment, and avoiding these potholes through disciplined credit underwriting is of paramount importance.
Municipal Bond Market Commentary
- Yields moved lower across the curve in US Treasuries and municipals for the week ending Sept. 6. AAA muni yields were down 6, 6, 7, and 9 bps at 2, 5, 10 and 30 years. The AAA municipal bond curve underperformed US Treasuries across the curve, with US Treasury yields falling 27, 22, 20, and 18 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios rose, up 3% at 2 years, and up 2% at 5, 10 and 30 years to end the week at 66%, 69%, 71% and 89%. AA Muni/AA Corporate ratios were flat at 2 and 30 years, and up 1% at 5 and 10 years to end the week at 62%, 64%, 66% and 80% at 2, 5, 10 and 30 years.
- For the period ending Sept. 4 municipal bond funds had inflows of $956 million, the 10th consecutive week of reported positive flows.
- There is a large muni new issue calendar, expected to be around $15.2 billion this week.
Our take: Rates reversed last week’s move higher and resumed the trend to lower rates. The recent economic data (esp. Non-farm payrolls, CPI, PPI) hasn’t given the market any reason to doubt that the Federal Reserve will begin cutting interest rates at the FOMC meeting on September 18, though it does appear that a 25bp cut is more likely than 50bp. Munis should continue to follow USTs, albeit with the usual lag. The next several months are expected to bring higher than normal municipal issuance, but that is potentially offset by flows, as economic slowdowns have historically let to greater municipal fund inflows.
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