Weekly Fixed Income Commentary (November 30, 2023)
Economic Commentary
- October new home sales fell 5.6% to 679K, below the consensus, 723K. Net revisions were -62K.
- 3Q real GDP growth was revised higher from 4.9% to 5.2% (consensus: 5.0%), but the details were mixed as real consumer spending growth was trimmed from 4.0% to 3.6%.
- The numerous Fed speakers this week offered non-hawkish comments, even from those considered to be hawks… they may not have all been dovish, but they were definitively not hawkish.
- Treasury had mediocre UST auctions this week on 7s, 2s and 5s.
- The Fed’s Beige Book release described slowing economic activity in recent weeks as consumers pulled back on discretionary spending, and labor demand continued to ease.
- Personal income rose 0.2% in October, in line with the consensus. Net revisions were +0.2pp. Real consumption rose 0.2%, a tenth above the consensus, 0.1%. Net revisions were -0.1%.
- The core PCE deflator rose only 0.16%, pushing the year-over-year rate down to 3.5%, from 3.7% in September. The Fed’s favorite gauge of underlying inflation, the PCE supercore (core services excluding shelter), rose only 0.148% in October after an upwardly revised 0.447% in September.
- Initial jobless claims rose to 218K from 211K, in line with the consensus. Continuing claims have risen to their highest level since late 2021, suggesting the people who lose their jobs are finding it harder to get new positions. The labor market is losing momentum.
Our take: A lot of economic data has been released this week, which has continued to reinforce the trend of progress towards lower inflation and slowing economic activity. The bond market has done a complete 180, and rates have come down almost 70bp in less than 6 weeks from a combination of this favorable data and investor positioning going from very short USTs to now more balanced long UST positions. It makes sense for the furious rally to take a breather and look for continued confirmation from the data over the coming weeks and months, and a modest backup within a trading range is likely. We still believe duration will be your friend over the next 6-12 months, but if you haven’t begun to extend the duration of your portfolios, consider waiting for a pullback to do so. If you have extended duration, consider adding some cheap out-of-the-money hedges.
Corporate Bond Market Commentary
- US HY tightened 14bp last week to +385bp. Total returns were +0.4% (BBs +0.5%, Bs +0.4% and CCCs +0.4%).
- No new issues priced. Fund flows were +$824 million, a deceleration from the last few weeks.
- US IG spreads tightened 6bp to +114, driving total returns of +0.39%.
- The IG primary market priced only $5.5 billion in the holiday-shortened week. Fund inflows were +$1.265 billion, the first positive flow since a small inflow in mid-September.
Our take: Earnings season is largely complete except for some retailers and laggards, clearing a path for (relatively) smooth path free of too many tape bombs before year-end. What happens in early 2024 when guidance might need to be cut and 2024 outlooks are provided is another story. Even though fund inflows have moderated off the torrid pace of previous weeks, sentiment is very positive and there is very little new-issue supply, which should provide a supportive environment into year end. Fund managers who are performance-chasing will add some fuel to the fire. As we have been pounding the table for a while, up in quality, out in duration positioning makes sense at this point in the rates and economic cycles.
Municipal Bond Market Commentary
- For the week ending November 24, high grade tax-exempt municipal bonds yields fell in a nearly parallel shift, falling 10, 10, 10 and 8 bps at 2, 5, 10 and 30 years, bucking the trend of US Treasuries where yields rose by 6, 4, 3, and 1 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios fell 2-3 percent at 2, 5, 10, and 30 years, ending the week at 63%, 64%, 66% and 87%. AA Muni/AA Corporate ratios fell 1-2 percent across the curve to end the week at 61%, 60%, 61% and 79% respectively.
- For the period ending November 22, municipal bond funds reported inflows of $292 million
- After a very light Thanksgiving week calendar, the new issue muni calendar is expected to rebound to $8.62 billion.
Our take: We maintain that this is an opportune time to invest in high grade municipals as after-tax yields remain elevated, the Fed appears to be done hiking, and negative net supply in December and recent inflows all supporting muni prices. That said, muni ratios have become richer in the last several weeks and it is likely that ratios revert and municipals underperform US Treasuries in the short term, unless the muni market continues to be supported by fund inflows.
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