Weekly Fixed Income Commentary (February 6, 2025)
Economic Commentary
- The ISM Manufacturing Index rose 1.7 points from a revised 49.2 to 50.9, the highest since April 2022. The rise reflected better-than-expected new orders and employment, which rose to 55.1 and 50.3, respectively.
- ISM services showed weaker activity, though not alarmingly so. 52.8 is far enough above breakeven 50 to indicate solid growth. Meanwhile, the prices paid component, which spiked to 64.4 in December, eased a bit to a still-too-high 60.4, about five points lower than expected.
- Productivity rose 1.2% in the fourth quarter, as expected, and unit labor costs, expected to be up 3.4%, rose only 3.0%.
- Jobless claims at 219k were a bit higher than expected, but still low enough to be consistent with very slow labor turnover.
- According to Bloomberg News, Scott Bessent has apparently convinced President Trump long-term rates are the ones that matter — much like Robert Rubin did with Bill Clinton in the ’90s — and said he would focus on bringing long-term rates lower independently of the Fed.
- In the highly anticipated Treasury refunding announcement, the auction sizes for most coupon securities were left unchanged, as was widely expected. However, the “dovish” surprise was that the press release left in the guidance saying Treasury doesn’t expect auction sizes to change “for at least the next several quarters.” Treasury Secretary Scott Bessent had, in the past, criticized Treasury’s approach of funding its debt with such a large share of bills, leading some analysts to expect explicit guidance yesterday for higher coupon issuance down the line.
- The December Job Openings and Labor Turnover Survey (JOLTS) showed job openings fell more than expected, to 7.6 million vs a consensus estimate of 8 million. The job openings rate fell from 4.9% to 4.5%, the lowest since September, when the Fed kicked off rate cuts for fear of a deteriorating jobs market. Quits increased to 3.2 million in December.
- The PCE deflator rose 0.3% headline and 0.2% core, as expected, but the core increase was rounded up from 0.156%. The year-on-year increases were as expected, with the headline rising from 2.4% to 2.6% (2.55%) and core unchanged at 2.8%. Very friendly base effects in the first four months of the year should result in lower year-on-year readings in the next few months.
- The personal income rise of 0.4% was built on a 0.4% rise in wage and salary income. Consumer spending rose 0.7%, as expected, and rose 0.4% in real dollars. One troubling aspect is half the real income growth in the past two months came from transfer payments, an extraordinary amount during a period of economic growth. The saving rate fell from 4.1% to 3.8%.
Our take: A lot of economic data has arrived over the last week, and most of it is suggestive of slowly cooling prices and a balanced if not softening labor market. We await clarity on how behavior is affecting late 2024 and early 2025 data, as consumers and businesses may have altered their behavior to get out ahead of potential tariffs. At the same time, constructive comments from Scott Bessent about focus on 10-year Treasury rates and bringing them down, and the treasury refunding announcement that was a pleasant surprise, have all led to a rally in USTs and a move lower in rates. If the government follows through on spending cuts and fiscal discipline, while the economy tracks sideways and the labor market stays balanced, rates could come down further. However, if tariffs rear up again or other policies reignite inflation concerns, the progress could be short-lived. Staying nimble and trading ranges should be additive to returns in 2025.
Corporate Bond Market Commentary
- IG spreads widened 2bp to +82bp and total returns were +0.39%.
- Fund flows were +$810 million.
- New issue supply was $31.6 billion, easily digested, with 2.7bp new issue concessions, 3.5x book coverage and an 18% attrition rate.
- HY spreads widened 8bp to +268bp and total returns were +0.18% (BBs +0.27%, Bs +0.17%, CCCs -0.22%).
- Fund flows were +$480 million.
- New issue supply was $13.1 billion, including the $5.45 billion dual tranche deal for Quikrete Holdings.
Our take: Corporate bond markets continue to perform well, absorbing new issues easily and avoiding turbulence from some of the policy headlines coming from DC. The recent decline in US Treasury rates has also been constructive. Performance from here will continue to depend on more of the same – insulation from major policy shocks and a stable rate environment. Additionally, corporate earnings need to hold up in the face of tariff and supply chain uncertainty and consumers who are perhaps approaching their limit from declining savings and a softening job market. All-in yields are still attractive, so a range-bound rates market will offer ample opportunities for solid returns in 2025.
Municipal Bond Market Commentary
- Yields continued to fall in the week ending January 31 in both municipal and US Treasury bonds. AAA muni yields were down 7, 7, 8, and 6 bp at 2, 5, 10 and 30 years while the US Treasury yields were down 7, 10, 8, and 6 bp at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were unchanged except at 10 years, where the ratio fell 1%, to end the week at 65%, 65%, 67% and 83%. AA Muni/AA Corporate ratios were down 1% at 2 and 5 years and unchanged at 10 and 30 years to end the week at 64%, 62%, 63% and 77% at 2, 5, 10 and 30 years.
- Municipal bond funds had inflows of $742 million for the weekly period ending January 29.
- Muni issuance is expected to be around $6.2 billion this week.
Our take: Municipal bond demand technicals remain strong, supported by yields that remain near 12 month highs, and reinvestment dollars and fund inflows outpacing new issue supply.
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