Weekly Fixed Income Commentary (January 2, 2025)
Economic Commentary
- The Chicago PMI was 36.9, below expectations of 43.0 and down from 40.2 in November.
- Initial jobless claims fell to 211k, the lowest level since March. Continuing claims of 1,844k were also below expectations of 1,890k.
- The Atlanta Fed GDPNow Forecast for Q4 was revised lower to 2.586%, down significantly from the ~3.36% estimate as of a few weeks ago.
- The East Coast Ports labor dispute is back in focus ahead of the strike deadline of January 15th, as talks are set to resume on January 7th. The key sticking point is the use of automation.
- The S&P Global US Manufacturing PMI came in at 49.4 versus the 48.3 estimate.
Our take: Meaningful economic data has been scant over the last few weeks but will start to pick up again shortly. Q4 rearview data remained relatively healthy, as rate cuts and anticipated cuts in August and September boosted sentiment and loosened financial conditions, giving businesses and consumers the green light to spend in Q4. The more recent significant rise in 10s and 30s will undoubtedly have a cooling effect on rate-sensitive sectors of the economy in the months ahead. Waning fiscal stimulus will no longer be as much of a tailwind either. The significant downward revision to the Atlanta Fed GDPNow forecast for Q4 might be a sneak preview for slowing momentum late in Q4 and into Q1. The impact of actions taken (or not taken) by the incoming administration should tip the scales one way or the other. As we wrote last week, prevailing sentiment is for still-higher rates and a further steepening of the yield curve. While this may prove-out, we see reasons to consider the contrarian side of the trade and will be adjusting positioning and hedges accordingly.
Corporate Bond Market Commentary
- IG spreads were 1bp tighter to +81bps.
- Total returns were -0.28%, bringing YTD returns down to 2.54%.
- Fund flows were -$780 million.
- There were no new issues last week, but several right out of the chute today and $15 billion expected over the two days of January 2-3.
- HY spreads were 2bp tighter to +284bps.
- Total returns were +0.06% (BBs 0.0%, Bs +0.12%, CCCs +0.17%), bringing YTD returns to +8.14% (BBs 6.25%, Bs 7.59%, CCCs 18.16%).
- Fund flows were -$2.22 billion.
- There was no new issue supply last week.
Our take: HY bonds, and particularly the CCC-rated cohort, had another strong year in 2024. For investment grade credit, not so much. With strong economic performance and loose financial conditions, credit spread performance far outweighed duration. With the recent backup in yields, the starting point for BBs and Bs is more compelling. Within CCCs there has been significant dispersion, where performing credits performed very well, while adverse events created landmines for others. This is fertile ground for us – fundamental credit picking – and when the entire HY universe is attractive and potentially available to us, the hunting is even better.
Municipal Bond Market Commentary
- The week ending December 27 saw yields rise slightly in a holiday shortened week. AAA muni yields were up 2 bp at 2, 5, 10 and 30 years while US Treasury yields were down 1, and up 6, 8, and 8 bp at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were up 1% at 2 years, unchanged at 5 years and down 1% at 10 and 30 years to end the week at 66%, 66%, 68% and 81%. AA Muni/AA Corporate ratios were down 2% at 2 years, unchanged at 5 and 10 years, and down 1% at 30 years to end the week at 66%, 65%, 65% and 77% at 2, 5, 10 and 30 years.
- Municipal bond funds had an outflow of $879 million, which is now three consecutive weeks of redemptions, albeit somewhat modest in size.
- Muni issuance is expected to be less than $1 billion in this holiday shortened week.
Our take: It was a relatively quiet week, with little volume and little major news. We continue to expect rate volatility over the near term as participants try to read the tea leaves of Fed monetary policy, uncertainty about the Trump’s administration’s fiscal policies and whether he’ll be successful in getting Republican support, and multiple ongoing conflicts across the world. Municipal bond relative value technicals continue to be favorable with negative net supply and very strong fund flows over the last 6 months that will likely return; historically concerns about economic growth have led to positive fund flows for municipal bonds.
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