Weekly Fixed Income Commentary (January 4, 2024)
Economic Commentary
- FOMC minutes suggest, but do not guarantee, that rate hikes are over, and offer no timetable on cuts. Based on the dot plots, the Fed expects to cut rates three times this year, mostly because inflation is falling so much faster than expected when they updated their forecast in September.
- The November JOLTS data showed a generally cooling labor market. Job openings fell to 8.79 million, a little higher than expected. The big news was quits, which fell to 3.471 million, the lowest since the pandemic and back to 2019 levels for the first time, indicating more caution among workers.
- ADP reported a 164K increase in private payrolls, above the consensus of 115K. Initial claims fell to 202K from an upwardly revised 220K, below the consensus of 216K. Claims numbers are always volatile around the turn of the year, so we doubt that the latest numbers are indicative of the underlying trend.
- Commercial banks are starting to add securities to their balance sheets again after being sidelined in the second and third quarters of last year, short of cash after the regional banking crisis and afraid to add duration risk when yields were showing no sign of reaching a peak. When the bond market did capitulate at the end of October, falling yields gave banks more confidence to buy again, which started a positive feedback loop. Commercial banks have now increased securities on their balance sheets for two months but, at $5.1 trillion as of the week ending December 20, there is still a lot more room until the levels return to the pre-SVB world. This is a supportive technical for USTs and the bond market overall.
Our take: Economic data has been sparse and not overly reliable this time of year. Interest rates have backed up a bit after the massive rally into year-end, which is not a surprise. Most of this has been technical, as rates declined during a very slow couple of weeks of trading, and also because of the large amount of IG bond issuance in the first week of the year. Rates will find their footing but will continue to take their cues from both economic fundamentals and trading technicals and will likely operate within a range for Q1 before generally heading lower. Adding duration on these pullbacks and trading around these ranges can add incremental return in 2024.
Corporate Bond Market Commentary
- HY spreads were 5 tighter last week to +334bp and total returns were +0.35%.
- Fund flows were +$7.9 million.
- There were no new issues last week, and only one deal so far this week. We expect HY issuance to pick up starting next week.
- IG spreads were 3bp tighter to +104bp and total returns were +0.41%. Fund flows were +$135.8 million.
- There were no new issues in IG last week, but the deluge we expected this week is in full force. Concessions have not been overly attractive yet, and new issues have not generally performed very well, but as we get through the initial wave and rates start to stabilize, performance should grind.
Our take: The tactical decision to trim some positions into the year-end rally and raise cash in anticipation of a backup in rates and wave of supply has been a good one. We are dabbling in some new issues but waiting a bit longer to deploy some of the cash, looking for a bit more stability in rates and juicier new issue concessions to put a bit more pressure on secondary market prices. 2024 will not be a straight line, and a tactical approach should prove out its value in spades.
Municipal Bond Market Commentary
- Municipal bond returns were +0.23% last week, finishing the year at +6.48% after the significant rally in November and December.
- Last week, municipal bond funds experienced outflows of $464 million.
- 30-day visible net supply is $8.412 billion, rebuilding the calendar after the slow holiday season.
- BVAL AAA muni/UST ratios were essentially unchanged at 84.463% in 30 years and 58.479% in 10 years.
- State and local government third-quarter collections of Big 4 (sales, property, personal income and corporate income) tax revenues rose 1% year over year, continuing the trend of generally healthy credit conditions for municipal borrowers.
Our take: Muni ratios are sitting close to their 52-week lows at the intermediate and long end of the curve, indicating that future performance is likely to track interest rates and coupon returns, given that further outperformance versus treasuries will likely be difficult to achieve. Nevertheless, technicals are largely supportive and municipal credit is healthy, so on a risk adjusted basis IG municipal bonds remain an attractive asset class.
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