Weekly Fixed Income Commentary (February 20, 2025)
Economic Commentary
- After rising immediately following the upside surprise for January inflation data, UST yields ended the week slightly lower in a modest bull steepened. The 2Y fell -3 bp to 4.26% while the 10Y fell -2 bp to 4.48%. While hotter-than-expected CPI and PPI inflation reports and the strong January payrolls report had pushed market sentiment away from rate cuts, January retail sales materially missed expectations, highlighting some weakness in the consumer.
- Yesterday’s Fed minutes were largely as expected with participants noting that inflation readings in November and December had exhibited progress, however several members cautioned that other factors could hinder the disinflation progress including the uncertain effects of “changes in trade and immigration policy as well as strong consumer demand.” US Treasury’s did not seem concerned by these comments particularly, with yields declining into the close yesterday. Overall, the minutes echoed Chair Powell’s wait-and-see attitude in his post-meeting press conference. Markets are not fully pricing in a cut until the September meeting.
- This morning, Treasury Secretary Bessent stated on Bloomberg TV that terming out Treasury debt is “a long way off,” spurring a small rally across the curve.
- 412 of the S&P 500 have now reported for 4Q, with EPS growth (+10.6% y/y vs +8.5% y/y at 3Q) and revenue growth (+5.0% vs +5.2% at 3Q) both above consensus (+8% EPS, +4% revenue).
Our take: January CPI and PPI data suggest that inflation remains problematic, and while retail sales showed that the consumer may be taking pause, only time will tell if this is a trend. There are many moving parts right now and as reflected by the Fed, a wait-and-see approach is about the only possible path right now. In the meantime, interest rates will move around and trading the range or actively adjusting positioning can add alpha to bond portfolios. Positive earnings surprises are reassuring for the underlying health of the economy.
Corporate Bond Market Commentary
- IG spreads tightened 4bp to +80bp and total returns were +0.31%.
- Fund flows were +$10.2 billion.
- New issue supply was ~$50 billion. Order books continue to be ~4x with offerings moving in ~25bp from initial price talk, and concessions minimal.
- HY spreads remained flat at +267bp and total returns were +0.41% (BBs +0.38%, Bs +0.37%, CCCs +0.52%).
- Fund flows were +$1.1 billion.
- New issue supply was $4.05 billion.
Our take: Rate moves continue to drive bond price performance, as the interest rate volatility is dwarfing spread moves. So far, the earnings season has been solid, with JP Morgan reporting that 2x as many HY companies have beaten EBITDA expectations as missed, however guidance has been more negative than positive on the margin. The riskier cohort of companies is still yet to report. Many companies are steering to more conservative guidance due to macro uncertainty. This is understandable, and as market participants we must monitor closely for the developing impacts of trade and tariff policy on a name-by-name basis. As always, at these tight spreads it is imperative to avoid downside surprises as there is much more room to widen versus tighten.
Municipal Bond Market Commentary
- Muni yields rose slightly, and US Treasury yields fell slightly over the week ending February 14. AAA muni yields were up 3, 4, 4, and 5 bp at 2, 5, 10 and 30 years while the US Treasury yields were down 3, 2, and 2 bp at 2, 5 and 10 years and unchanged at 30 years.
- AAA Muni/Treasury ratios rose with the relative underperformance of municipal bonds, 2% higher at 2 years and 1% higher at 5, 10 and 30 years to end the week at 62%, 64%, 67% and 85%. AA Muni/AA Corporate ratios also rose 2% at 2, 5, and 10 years and 1% at 30 years to end the week at 63%, 62%, 63% and 77% at 2, 5, 10 and 30 years.
- Municipal bond funds had inflows of $239 million for the weekly period ending February 12.
- Muni issuance is expected to be around $5.6 billion this week.
Our take: Smaller fund inflows and a larger new issuance calendar pushed muni/US Treasury ratios slightly higher this week. Some analysts are predicting slightly lower rates could bring more issuers to market so supply/demand technical bear watching but the primary driver of municipals will continue to be changes in the benchmark US Treasury curve.
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