Weekly Fixed Income Commentary (February 29, 2024)
Economic Commentary
- PCE inflation increased, with core PCE rising +0.4%. While the monthly increase picked up, the year-over-year increase is down to 2.8%, the lowest since early 2021.
- Personal income rose 1.0%, well ahead of the 0.4% consensus, and personal consumption rose only 0.2%, confirming the thesis of weather-related retail spending weakness.
- Durable goods orders fell 6.1% in January, and Boeing reported a zero order month in the midst of the Alaska Air incident.
Our take: The trend of deflating goods and sticky services inflation continues with recent economic data. Some of these may prove to be the unusual January seasonal adjustments or other temporary head-fakes. However, reacceleration of inflation is not really built into most investors’ portfolios, but it probably should be. We are remaining somewhat cautious on adding additional duration, waiting for the 85bp of cuts currently priced into markets for 2024 to get closer to 75bp or below. We also continue to employ our disciplined approach to low-cost hedging using out of the money puts on UST futures to protect against any significant move higher in rates.
Corporate Bond Market Commentary
- US High Yield tightened 11 bp last week to an OAS of +323 bp. On a total return basis, US HY rose +0.5% on outperformance from CCCs (+1.1%) versus Bs (+0.4%) and BBs (+0.4%). On a YTD basis, US HY is +0.3% with CCCs (+0.8%) leading Bs (+0.4%) and BBs (+0.1%).
- US HY primary markets were active again last week bringing the MTD total to ~$23 billion. YTD issuance now totals ~$54 billion.
- HY fund flows were +$489 million.
- IG spreads tightened 1bp to +95bp. Combined with UST yields falling, total returns in IG were +0.44%.
24 issuers priced a total of $53.4 billion of new IG supply, slightly above the $50 billion expected, including the $15 billion Abbvie deal. Demand continued to be strong with books averaging 4.9x oversubscribed and NICs averaged zero. - IG funds had $1.025 billion of outflows, the first since early December.
Our take: The demand for yield is insatiable right now. Flows are coming in from retail, insurance, annuity, and well-funded pension buyers all looking to lock in attractive all-in yields before rates start to head lower. While this intuitively makes sense, these flows are coming into IG and HY markets that are already trading very tight on a spread basis. The battle of techincals (flows) versus fundamentals (spread valuations) continues to wage on. Our tactical approach allows us to toggle across opportunities, chase single name best ideas, and find situations that are process-driven or otherwise idiosyncratic and not necessarily beholden to broader market trends.
Municipal Bond Market Commentary
- For the week ending February 23, the high grade tax-exempt municipal bond yield curve was unchanged at 2, 5, 10 and 30 years, slightly outperforming US Treasuries at 2 and 5 years and lagging US Treasuries at 10 and 30 years. US Treasury yields were up 5 bps at 2 years, 1 bp at 5 years, down 3 bps at 10 years and down 7 bps at 30 years.
- AAA Muni/Treasury ratios were down 1% at 2 years, unchanged at 5 and 10 years, and up 1% at 30 years, ending the week at 60%, 58%, 60% and 85% at 2, 5, 10 and 30 years. AA Muni/AA Corporate ratios were unchanged at 2 and 30 years and down 1% at 5 and 10 years to end the week at 61%, 56%, 54% and 76% respectively.
- For the period ending February 21, municipal bond open end funds reported outflows of -$106 million while ETFs reported inflows of +$103 million.
- The muni new issue calendar is expected to be about $8.0 billion this week.
Our take: After rising rapidly over the first two weeks of 2024, US Treasury yields have found a trading range and municipal bonds have followed suit. We’ll be closely watching economic data and Fed commentary for catalysts to move the US Treasury curve, and municipal net supply and fund flows that could impact the relative value of municipal bonds.
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