Weekly Fixed Income Commentary (January 23, 2025)
Economic Commentary
- The Treasury market’s focus this week has been on what President Trump implemented via executive order, and any early reads on future tariff enactment. Market moves will depend on how developments compare to prevailing expectations for stimulative fiscal policy and higher tariffs.
- The index of leading economic indicators declined -0.1% in December, in line with expectations and down from a revised +0.4% increase in November.
- Initial jobless claims rose 6k to 223k last week, only slightly above the 220k estimate. However, continuing claims rose to 1.899 million and are at the highest level since November 2021.
Our take: The Fed’s meeting next Wednesday could be one of the more uneventful ones in recent times. Rates are widely expected to remain unchanged, and officials won’t feel compelled to offer much forward guidance. That leaves big surprises in Q4 GDP or core PCE inflation next week as potential catalysts for interest rate moves, though we expect the next narrative-shifting data event will be the February 7 jobs report. The new administration is focusing its initial action on immigration, spending, and deregulation, while the potentially disruptive tariff issues appear to be going more slowly. This should not beget complacency; tariffs very well may be coming, just not yet. We fully expect volatility to be the norm, and embrace trading around these ranges to enhance returns in 2025.
Corporate Bond Market Commentary
- IG spreads tightened 1bp to +82bp and total returns were +1.02%.
- Fund flows were +$489 million.
- New issue supply was $57 billion, ahead of the $40 – $45 billion expectations. Order books averaged 3.3x and NICs of 2.3 bp were minimal.
- HY spreads tightened 17bp to +264bp and total returns were +0.86% (BBs +0.81%, Bs +0.86%, CCCs +1.04%).
- Fund flows were +$151 million.
- New issue supply was only $2.28 billion.
Our take: Investment grade new issuance remains robust, and the supply is being digested easily. High yield new issuance is still anemic to start the year, and this has helped support prices of existing bonds, as fund managers have ample cash balances and coupon and principal payments this month have added more firepower. Earnings season is off to a good start in IG and is just about to get underway in earnest for the healthier HY cohort. As always, we will be parsing management commentaries and 2025 outlooks. Our expectation is that this year, more than others, they will remain vague given all of the uncertainty around tariffs and other potential policy that could impact their businesses.
Municipal Bond Market Commentary
- The week ending January 17 saw yields falling in both municipal and US Treasury bonds. AAA muni yields were down 2, 3, 4, and 5 bp at 2, 5, 10 and 30 years while US Treasury yields were down 10, 14, 13, and 9 bp at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were up 1% at 2 years, up 2% at 5 years, up 1% at 10 years, and unchanged at 30 years to end the week at 66%, 67%, 69% and 83%. AA Muni/AA Corporate ratios were up 3% at 2, 5 and 10 years and up 1% at 30 years to end the week at 67%, 65%, 66% and 77% at 2, 5, 10 and 30 years.
- Municipal bond funds had outflows of $251 million for the weekly period ending January 15.
- Muni issuance is expected to be around $7 billion in this week.
Our take: Brokers report strong two-way flow in municipal trading, with demand supported by the highest muni yields in a year. As often happens when tax reform and spending cuts are being discussed, a leaked report from the House Ways and Means Committee indicates that the municipal tax-exemption elimination is being considered. As in the past, it’s a remote but real possibility that municipal market participants are watching. The current proposal would not eliminate the tax-exemption on already-issued bonds.
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