Weekly Fixed Income Commentary (October 2nd, 2024)
Economic Commentary
- The September ISM Manufacturing Index was unchanged in September at 47.2, but the prices paid unexpectedly fell 5.7 points into contraction in August, from 54.0 to 48.3, the biggest drop in the series since May 2023.
- PCE rose 0.091% in August and 2.24% year-over-year, the lowest level since early 2021.
- Job openings rose from a revised 7.71 million to 8.04 million, well above expectations. However, the quits rate sagged to 1.9%, the lowest since June 2020, suggesting workers are reticent to leave their current jobs due to lack of confidence in their ability to find a new or better one.
- Dockworkers struck ports down the entire East coast and the Gulf for the first time since 1977. The combined capacity of affected ports accounts for as much as half of US trade volumes, according to Bloomberg News. The closures immediately affect auto and container shipments. Energy and bulk cargoes will not be affected. Some exceptions will be made for defense shipments and cruise ships. The National Association of Manufacturers estimates a loss of $2.1 billion in trade a day and an economic loss of up to $5 billion a day. If the strike lasts a week, the backlog will take a month to clear.
- ADP showed 143,000 private sector jobs added in September, ahead of expectations of 125,000. Historically, ADP does not have great predictive value for the BLS employment report due out on Friday.
Our take: Interest rates have drifted higher over the last couple of weeks since the FOMC meeting. Perhaps it’s a bit of buy the rumor / sell the news. The market had already been way ahead of the Fed on the number of cuts in 2024 and 2025, and nothing in the recent economic data has been weak enough to keep the market at those levels. However, much of the data is second or third tier in importance or predictive value and is generally lagging in nature rather than leading. Starting with Friday’s payrolls report, the quality and importance of the data will pick up and give us a better direction on rates. Of course, the port strike, if it were to continue, would throw a wrench in things, and the escalation of the conflict in the Middle East would similarly inject some volatility and uncertainty. We have raised cash and trimmed some positions, expecting volatility to create attractive re-entry points on rates and credit over the coming days and weeks.
Corporate Bond Market Commentary
- IG spreads tightened 1bp to +92bp and total returns rose a modest +0.04%.
- IG fund flows were +$1.119 billion.
- New issuance was $37 billion.
- HY spreads also tightened 1bp to +314bp and total returns were +0.12% (+0.04% BBs, +0.08% Bs, +0.53% CCCs). CCCs are now up +15.50% YTD.
- HY fund flows were +$135 million.
- New issuance was $9 billion.
Our take: CCCs have rallied for five straight months, the longest since June 2021, after recording gains for 13 straight weeks. Sizeable new issuance has been well-absorbed and the normal September volatility was muted. Now we have escalated geopolitical issues and a port strike. Perhaps September volatility was simply delayed into October rather than avoided altogether. With the election now a month away, all of these uncertainties may prompt a bit of a pullback. We will be ready with dry powder and a shopping list.
Municipal Bond Market Commentary
- Little change in either US Treasury or municipal bond yields for the week ending Sept. 27. AAA muni yields were down 1 bp at 2 and 5 years and up 1 bp at 10 and 30 years while US Treasury yields fell 3 bps at 2 years, rose 1 bp at 5 and 10 years and up 2 bps at 30 years.
- AAA Muni/Treasury ratios were unchanged except for the 30 year which is 1% richer, to end the week at 67%, 68%, 70% and 86%. AA Muni/AA Corporate ratios were down 1% at 2 years and up 1% at 10 years with 5 and 30 year ratios unchanged to end the week at 64%, 64%, 67% and 80% at 2, 5, 10 and 30 years.
- For the period ending Sept. 25 municipal bond funds had inflows of $716 million, the 12th consecutive week of reported inflows.
- The muni new issue calendar is expected to be around $11.25 billion this week.
Our take: Fixed income markets continue to watch economic numbers, especially those related to employment and inflation, trying to divine signs of economic slowdown and the timing of future Fed rate cuts now that the easing cycle has begun. Domestic markets are also subject to being moved by global events such as government stimulus in China and the growing conflict in the Middle East. The next several months are expected to bring higher than normal municipal issuance, but timing and volume could be volatile as issuers weigh the potential impacts of the November elections. Recent inflows have been strong and are likely to continue as economic slowdowns have historically let to greater municipal fund inflows.
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