Weekly Fixed Income Commentary (January 8, 2025)
Economic Commentary
- JOLTS job openings rose to 8.09 million, above 8 million for the first time since May.
- The ISM services index rose from 52.1 to 54.1, and participants noted the threat of tariffs driving orders and prices paid. The prices paid index rose from 58.2 to 64.4.
- 10 year UK Gilts are up to 4.77%, their highest since 2008.
- ADP reported 122k new private sector jobs, below the 146k estimate. Jobless claims fell to 201k last week, 14k below estimates.
- Minutes from the December FOMC meeting show members cautious about future rate hikes as they assess stubborn inflation and begin to incorporate assumptions for future policy.
Our take: Higher rates and a steeper UST curve, yet again. Like groundhog day. This significant move is approaching levels where things maybe start to break. Someone is on the wrong side of this rapid move – hopefully not leveraged structures like banks or non-bank financial institutions. The drift higher in rates is partly on account of economic data which does not show any significant signs of weakness, but largely attributable to concerns about policy under the incoming administration. If those fears come true, rates could go higher still, at least until they cause real world consequences. If the bark proves worse than the bite, a rapid reversal could follow. 2025 will be a tricky year for USTs and rate-sensitive fixed income. We have ways to overcome this adversity and generate returns through trading around the volatility, employing hedges, adjusting duration, and adding credit duration where appropriate.
Corporate Bond Market Commentary
- IG spreads widened 2bp last week to +83bp and total returns were -0.13%.
- Fund flows were -$753 million.
- $16.1 billion of new issue supply came last week, essentially all on Thursday. Estimates for this week are $50 billion – we expect more.
- HY spreads tightened 3bp to +281bp and total returns were +0.32% (BBs +0.27%, Bs +0.37%, CCCs +0.43%).
- Fund flows were -$394 million and the third consecutive week of outflows.
- No HY new issues priced last week; the primary calendar should slowly start to awaken this week.
Our take: The strong reopening of the IG primary market has been well absorbed, with deals coming at very minimal concessions to secondary market levels. High Yield primary is creeping back to life more slowly, with just a handful of deals so far this week. Rate stability will be key to bring opportunistic issuers back into the market to compliment the serial regular issuers. With the pickup in M&A activity already this month, and more expected under a friendlier DoJ antitrust regime, more interesting deal-driven bond issuance should follow and offer fertile opportunities to trade the new issue market. In the meantime, rate moves are dwarfing credit spread changes. Perhaps Q4 earnings season will flip the narrative once it begins in earnest later this month. All-in yields on BBBs, BBs and Bs are compelling and some of the positions we added or augmented during weakness in December is bearing fruit.
Municipal Bond Market Commentary
- The week ending January 3 saw yields fall slightly in a holiday shortened week. AAA muni yields were down 5, 6, 7, and 6 bp at 2, 5, 10 and 30 years while US Treasury yields were down 5, 5, 3, and 1 bp at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were down 1% across the curve to end the week at 65%, 65%, 67% and 80%. AA Muni/AA Corporate ratios were down 1% at 2 years and down 2% at 5, 10, and 30 years to end the week at 65%, 63%, 63% and 75% at 2, 5, 10 and 30 years.
- Municipal bond funds had outflows of $350 million for the period ending 1/1/25.
- Muni issuance is expected to be around $5.3 billion this week.
Our take: It was a relatively quiet week with low trading volumes due to the New Year’s holiday. Fed monetary policy and uncertainty about the Trump’s administration’s fiscal policies and whether a narrow Republican majority in Congress can deliver Trump’s agenda are still the focus of the market. This has been a very substantial selloff in the bond market, as the 10-year US Treasury yield has risen 98 bps and the municipal AAA 10-year yield is up 47 bp since mid-September. Municipal bond relative value technicals continue to be favorable with negative net supply, but six straight months of fund inflows have now turned to a month of consecutive outflows even though historically concerns about economic growth have led to positive fund flows for municipal bonds.
Important Information
Investors should consider a fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about a fund. To obtain a prospectus, visit www.sheltoncap.com or call (800) 955-9988. A prospectus should be read carefully before investing.
It is possible to lose money by investing in a fund. Past performance does not guarantee future results. Any projections or other forward-looking statements regarding future events or performance of markets, companies, or otherwise are not necessarily indicative or differ from, actual events or results.
INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.
