Weekly Fixed Income Commentary (April 17, 2025)
Economic Commentary
- Retail sales rose 1.4% in March, in line with estimates. Sales excluding autos and gas rose 0.8% and control group sales rose 0.4%. The biggest increases were for autos, up 5.3%, building materials, up 3.3%, and sporting goods, up 2.2%. Some of this strength is likely attributable to a surge of buying ahead of the enactment of tariffs.
- On April 23, Treasury will report the share of foreign allotment in last week’s 3-year, 10-year, and 30-year auctions, which may be the first step towards understanding how much of last week’s UST selloff was driven by foreign governments selling some of their positions.
- The New York Fed’s estimate for the 10-year term premium – the compensation investors demand to hold longer-term term debt rather than rollover short-term debt indefinitely – rose to 71bp last Friday, its highest since September 2014.
- The NY Fed’s survey of consumer expectations found 1-year inflation expectations increased from 3.13% to 3.58%. Three-year expectations were unchanged at 3.0%. Mean unemployment expectations increased, with the number of people perceiving probability of losing a job in a year rising to 15.7%, the highest since March 2024. The increase was largest for those making less than $50,000 a year.
Our take: The hard economic data has remained adequate, but this information is backwards-looking and therefore does not yet reflect the potential negative effects of tariffs. Sentiment-based indicators have been rolling-over quite hard. It may take weeks or months for some clarity around whether weaker sentiment evolves into economic slowdown, and how deep and long the contraction could be. Some of the technical factors that drove interest rates higher last week, including the forced unwinding of basis trades and other leveraged positions, seem to be moderating, at least for the moment. This could allow rates to grind lower over the coming days towards the lower bound of the trading range, at which point we would look to lighten up a bit on duration (again), fully expecting another round-trip.
Corporate Bond Market Commentary
- IG spreads widened 4bp to +118bp, the highest level since November 2023, and total returns were -2.64%.
- Fund flows were +$108 million.
- Five issuers priced just $9.5 billion of new issue, below the subdued $10-$15 billion estimates. Demand was robust, with order books 5.2x covered, on account of generous 13bp concessions, but attrition was 29%, well above recent averages.
- HY spreads tightened 19bp to +426bp, but rising yields pushed total returns -0.48% (BBs -0.66%, Bs -0.35%, CCCs -0.05%). CCCs are still down -4.56% YTD.
- Fund flows were -$9.821 billion.
- No high yield deals priced amidst the volatility.
Our take: After last week’s turbulence, some relative calm this week has allowed rate-sensitive IG and BB bonds to grind higher this week, while lower-rated bonds were a bit more case-specific. IG new issuance is crawling back to life, while HY had only one deal this week. The initial earnings reports from banks were solid, while non-bank earnings are offering mixed outlooks in too small a sample size. We do believe that if the relative calm persists, it will allow for idiosyncratic performance, which is exactly what we would want in our actively managed credit-picking portfolios. Some of the recent changes we have made to our portfolios in adding some risk during the volatility are showing promising initial results, but the jury is still out.
Municipal Bond Market Commentary
- Muni yields rose sharply higher and the US Treasury curve also rose across the curve for the week ending April 11, 2025. AAA muni yields were up 64, 63, 64, and 64 bp at 2, 5, 10 and 30 years while US Treasury yields were up 31, 45, 50, and 46 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios snapped higher by 11%, 7%, 6%, and 5% at 2, 5, 10, and 30 years to end the week at 78%, 78%, 80% and 96% respectively. AA Muni/AA Corporate ratios also jumped substantially, rising 16%, 12%, 9%, and 6% at 2, 5, 10, and 30 years to end the week at 79%, 77%, 76%, and 86% respectively.
- Driven by the selloff, municipal bond funds had outflows of $3.3 billion for the weekly period ending April 9.
- Muni new issue volume is expected to be ~$6.9 billion this week.
Our take: Already facing upward pressure on AAA muni/UST ratios in the face of recent tax-related negative municipal fund flows, the rapid rise in Treasury yields caused an even larger move in tax-exempt yields. With tax-driven selling moderating after April 15, we would expect ratios to stabilize and likely retrace at least a portion of last week’s move in the near future. Like a broken record, nothing has changed in regard to the short-term primary driver of volatility in the municipal market being volatility in the benchmark US Treasury market due to fears of tariff driven stagflation.
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