Weekly Fixed Income Commentary (April 13, 2023)
Corporate Bond Market Commentary
- U.S. High Yield widened 11 bps last week to an OAS of 465 bp, and yields stayed roughly flat near recent lows at 8.54%
- On a total return basis, US HY decreased -0.04% on mixed performance from BBs (+0.07%), Bs (-0.04%) and CCCs (+0.07%). On a YTD basis, US HY is +3.8% with CCCs (+5.1%) still leading Bs (+4.0%) and BBs (+3.9%).
- HY funds reported a net inflow of $3.7 billion last week but have resumed outflows in the current week.
- US HY primary markets reopened with confidence following a three-week pause. Over $8bn in new issues priced in just two sessions of the shortened week. MTD issuance totals ~$8 billion, while YTD totals ~$49 billion. On the back of this, Goldman seized the opportunity to offload ~$4bn of subordinated debt used to fund the buyout of Citrix by Elliott.
Our take: The disconnect between the risk rally and Fed pricing continued over the shortened week aided by a light economic calendar. The high yield new issue market burst back open led by opportunistic issuers in the energy sector. This was a positive sign for the market, showing strength after a virtual standstill in the wake of the SIVB/Credit Suisse crisis. While the market has shown some confidence, most are wondering when the next shoe will drop in relation to the banking fallout. The narrative is growing that it may come from commercial real estate, particularly the office sector, with significant maturities on the horizon and stubbornly low occupancy rates. It is our belief that we will continue to see ripples in the market and thus we continue to maintain a core positioning up-in-quality. After the recent risk-rally, BB’s have bounced back quicker than CCC’s and we continue to sift through the lower-quality cohort for issuers that should be insulated from any turmoil but have been beaten down due to the broader backdrop.
Economic Commentary
- Headline CPI for March rose 0.1% just below the 0.2% expected consensus while core (ex food and energy) rose 0.4% as expected, as energy prices fell 3.5 % and food prices were unchanged. In services, Owners’ Equivalent Rent (OER) rose 0.5% and transportation services rose 1.4% with airfares up 4.0%.
- The payrolls report for March showed nonfarm employment grew by 236,000 very close to consensus expectations of 238,000. The unemployment rate fell to 3.5% from February’s 3.6% level. The largest employment gains were seen in the leisure and hospitality sector.
- Deposit outflows from banks appear to be stabilizing as borrowing at the Fed’s liquidity facilities declined modestly for a second week in a row. In addition, new FHLB debt issuance subsided since mid-March and flows into money market funds appear to be slowing.
- The FDIC hired BlackRock to conduct sales of the securities portfolios retained from Silicon Valley Bank and Signature Bank. The announcement indicated that the sales process would aim to minimize the potential for any adverse impact on market functioning by considering daily liquidity and trading conditions.
- Minutes for the March FOMC meeting reported broad support for the March rate hike but also indicated that with respect to future hikes, several officials “… emphasized the need to retain flexibility and optionality in determining the appropriate stance of monetary policy given the highly uncertain economic outlook….”
Our take: While the overall narrative continues its shift to recession rather than inflation, the most recent data still provides enough cover for the FOMC to hike another 25 bps in May. Whether this will mark the end of the hiking cycle and beginning of “the pause” will continue to be data dependent. Wage pressures continue to impact inflation, especially in the services sector. With respect to overall economic activity, it is critical to continue to watch for impacts on bank lending in the aftermath of the recent bank failures in March. Commercial real estate – particularly the office sector — is especially challenged with refinancing challenges. We will be closely following upcoming Q1 reports from JPMorgan, Citigroup, and Wells Fargo later this week for more insights into the banking sector. At the same time, there continues to be no further movement in Washington to address the Debt Limit — another factor that can add volatility to the rates markets over the next several months. With tax payments coming up we will ultimately get an update to the projected “X Date” when we will hit the ceiling.
Municipal Bond Market Commentary
- Last week high grade tax-exempt bonds outperformed Treasuries across the curve by 6 bps in the 2- and 5-year maturities, 9 bps in the 10-year maturity and 10 bps in the 30-year maturity. This continued municipal outperformance resulted in further richening of ratios as AAA Muni/Treasury ratios ended the week at 58%, 60%, 62% and 90%, while AA Muni/AA Corporate ratios finished at 56%, 56%, 58% and 76%.
- For the period ending April 5th, tax-exempt funds reported inflows of $92 million, consisting of $683 million of outflows from open-end funds and $775 million of inflows into ETFs.
- The primary calendar this week totals a manageable $5.9 billion. As of 4/12/23 the Bond Buyer 30 Day Visible Supply stands at $12.5 billion.
Our take: High-grade municipals have continued to follow and even outperform Treasuries to start the month. Through 4/11 the Bloomberg Municipal and High Yield Municipal Indices are up 101 and 152 bps, respectively. Fund flows have recently been neutral with year-to-date outflows (as of 4/5) of only $1.6 billion. Retail demand has softened a bit as it digested the mid-March bank stress but remains engaged. Municipals should continue to take their cues from the Treasury market. However, we remain on lookout for any signs of a significant spike in new issue supply which would put pressure on the market.
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