Weekly Fixed Income Commentary (June 29, 2023)
Corporate Bond Market Commentary
- High Yield spreads widened 21bps, the most for a week since mid-March, to +468bps
- Total returns were -0.7% driven by widespread weakness across ratings with BB’s -0.6%, B’s -0.79%, and CCC’s -0.9%.
- Investment grade spreads tightened by -1 bp to 135 bps while yields fell -1bp to 5.52%, resulting in weekly total returns gains of +0.21%.
- HY issuance was strong as issuers rushed to get ahead of potential weakness on Powell’s comments on continued hikes post pause. Six companies lined up to sell over $5bn, making it the busiest week this month.
- JPM published a mid-year piece on the state of HY markets highlighting the continued high quality amongst issuers with leverage at a decade low and interest coverage near highs. They narrowed their projected spread target for 2H23 to +525bps.
Our take: The market took a breather cooling off of several weeks of strong returns. Selling was orderly and steadily wider. It is not surprising given spreads have been quite tight and the market has felt a bit complacent. Yields touched over 9% before coming back down some this week. As some market participants are calling for a softer landing or later landing, the HY market may continue to see decent support on sell-offs given the attractive all-in yields offered and relative healthiness of issuers. That being said, we will watch upcoming 2Q earnings in July for company level data and revised forecasts which could shake the market out of complacency. We continue to look to be opportunistic, selling into tightness and maintaining a ballast of higher quality HY.
Economic Commentary
- Fed Chair Powell and other Fed officials reiterated that their battle with high inflation is not over. While the committee continues to send a message that two or more hikes may be needed by year-end, the market-implied terminal rate continues to indicate one more hike in July and that by September the Fed will be able to pause its campaign.
- Meanwhile, the BoE delivered an unexpected 50bps hike on Thursday and investors also absorbed a third straight week of more elevated claims, solid housing data, and a mixed June Flash PMI report.
- Data this week has shown resilience: months supply in the new home sales report dropped to its lowest level in more than a year and additionally, consumer confidence rose to its highest level since January 2022.
Our take: Continued mixed signals on the economy. We believe recent data does not meaningfully change the picture for the Fed. There will continue to be cautionary headlines from Powell and other Fed members while risk markets are strong to keep animal spirits in check even if the Fed does begin to see the economy cooling. Again, as the effects of banks tightening their lending standards continue to ripple throughout the economy, we believe the summer should show the further slowing in activity required for the Fed to take a break from hikes. Additionally, the 24 hour rebellion in Russia over the weekend was a reminder of the geopolitical risk that bubbles under the surface. Powell, the ECB’s Lagarde, the BoE’s Bailey, and the BoJ’s Ueda are scheduled to speak today at a policy panel in Europe.
Municipal Bond Market Commentary
- For the week ending June 23, 2023, high grade tax-exempt bond yields were 3 bps lower across the curve at 2,5,10, and 30 years, outperforming US Treasuries in the 2, 5, and 10 year by 6, 4, and 1 bps, and underperforming in the 30 year by 1 bp.
- Ratios were lower in the 2, 5, and 10 year maturities and unchanged for the 30 year, with AAA Muni/Treasury ratios ending the week at 61%, 65%, 68% and 93%. AA Muni/AA Corporate ratios finished the week at 61%, 61%, 60%, and 78% respectively.
- For the period ending June 21, tax-exempt funds reported inflows of $672 million.
- The new issue muni calendar for the week is $10.65 billion.
Our take: The high grade muni market rallied slightly across the curve during the holiday shortened week which was very light on economic data releases. No changes to our near term outlook for continued richness in the muni market over the Summer months, as new issuance is expected to be well short of reinvestment dollars from called and matured bonds, providing strong technical support for continued richness in municipal bonds. Current visible net supply is -$22.7 billion.
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