Weekly Fixed Income Commentary (August 31, 2023)
Economic Commentary
- The July JOLTS data showed broad labor market cooling, with the lowest quits rate (2.3%) since January 2021 and fewest job openings (8.827 million) since March 2021. There were also downward revisions to previous figures.
- Adding to the picture of a rebalancing of the labor market, the consumer confidence report for August showed the percent of households seeing jobs plentiful versus hard to get declined to 26.2% from 32.4%. Although this still signals a tight labor market, it is the lowest reading since April 2021.
- The one-year ahead median inflation expectation held steady at 4.9%.
- Overall consumer confidence declined by much more than expected in August dropping to 106.1, which was the lowest reading since February 2021 on both weaker current conditions and a drop in expectations.
- The personal saving rate declined to 3.5%, which puts excess liquidity at ~$366 billion, suggesting that households will run out of ‘excess’ by November or December.
Our take: The job market continues to show those signs of slowing one would expect early on in a broader slowdown. We continue to believe the economy is slowing more than meets the eye. Consumers have propelled recent strength, but if they are overspending versus earnings and drawing down savings, that is unsustainable. Coupled with lower confidence about future economic and employment prospects, student loan payments re-starting, and high interest rates on home, auto and credit card borrowings, there is trouble brewing. We continue to advocate up in quality and out in duration to prepare fixed income portfolios accordingly.
Corporate Bond Market Commentary
- Investment grade bond spreads were 4bp tighter to +123 and total returns were +0.35%. Fund flows were -$1.026 billion.
- High yield spreads were 12bp tighter to +390 and total returns were +0.49%, with BBs +0.43%, Bs +0.60% and CCCs +0.37%.
- Fund flows were -$697 million, and there was zero new issue supply. We expect this to pick up with a vengeance after Labor Day, with both opportunistic and M&A driven deals.
Our take: Get some rest and relaxation over the long Labor Day weekend, because September is going to be hairy. This week is the calm before the storm, as issuance will increase substantially, spreads are tight, dealer inventories are relatively high, and rates have come down from the highs of mid-August. We have trimmed a bit more into recent strength and have a shopping list and the dry powder ready to take advantage of attractively priced new issuance and existing bonds that go on-sale amidst the volatility we expect.
Municipal Bond Market Commentary
- For the week ending August 25, 2023, high grade tax-exempt municipal bonds yields were 4, 7, 8 and 7 bps higher across the curve at 2,5,10, and 30 years, outperforming US Treasuries by 10 bps in the 2 year, and underperforming US Treasuries by 2, 10, and 16 bps in the 5-, 10- and 30-year maturities respectively.
- AAA Muni/Treasury ratios were down 1% in 2 years, and up 1%, 2% and 3% in 5,10, and 30 years, ending the week at 63%, 66%, 69% and 92%. AA Muni/AA Corporate ratios were unchanged at 2 years and up 1%, 2% and 3% in 5,10, and 30 years to end the week at 63%, 63%, 64% and 82%.
- For the period ending August 23, municipal bond funds reported outflows of $534 million, of which $105 million was out of muni ETFs and $429 million was out of open-end funds.
- The new issue muni calendar is estimated to be smaller than normal at $3.74 billion.
Our take: The municipal market didn’t match last week’s US Treasury rally, instead pulling forward the expected price pressure as the technical supply imbalance that has supported the market in recent months is expected to flip to greater supply than reinvestment. AAA Muni/Treasury ratios will likely move higher, but no change to our view that overall direction of the muni market will be dictated by changes in the US Treasury curve as the Fed tries to navigate the economy to the 2% target inflation rate without throwing the economy into recession.
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