Weekly Fixed Income Commentary (April 17, 2024)
Economic Commentary
- Jay Powell acknowledged setbacks on the inflation front will keep rates higher for even longer. He noted that the year-on-year rate of core PCE inflation is unchanged and both three-month and six-month rates of change moved higher than the year-on-year rate. The market now sees just 30% odds of a cut in July, with one cut expected by November, and odds of a second cut by December at 90%. Expectations for cuts next year have come down significantly in the past month.
- Retail sales came in significantly stronger than expected to start the week, not only for March but also in revisions to February.
- The 10-year yield surged to recent highs, touching 4.69% on the backs of Powell’s comments.
- Housing starts were weaker than expected.
- Oil took a breather following a multi-week surge as the multi-fronted events in the Middle East continue to percolate.
Our take: We have been skeptical that the January & February data were simply bumps or anomalies. The Fed erred in allowing financial conditions to ease substantially, and above-trend growth and a stalling-out of inflation progress or reacceleration is the resulting outcome. It seems Powell is just now beginning to start to acknowledge and communicate this to the market. With the recent rise in rates to recent highs, it seems that we may be approaching a peak here, and legging into higher-quality duration would seem prudent.
Corporate Bond Market Commentary
- HY spreads widened 14bp to +346 and total returns were -1.35%. BBs (-1.4%) and Bs (-1.4%) outperformed CCCs (-1.8%).
- New issue supply was $7 billion.
- Fund flows were -$267 million.
- IG spreads widened 5bp to +92bp but rising UST yields drove total returns -1.18%.
- Fund flows were +$896 million.
Our take: US HY spreads widened, although showed some resilience on the backs of the significant rise in rates. HY may see some strength due to the meaningful all-in yields presented here. As we have pointed out before, issuer quality is strong in the space and we would look for opportunities to add to BB and select single B’s at attractive yields. While spreads are still relatively tight, they are better than they were at the end of March by ~35bps. The markets will watch for signs of stabilization in rates and a new trading range which will allow for some confidence in investing.
Municipal Bond Market Commentary
- For the week ending April 12, the AAA tax-exempt municipal bonds yields were 3, 4, 4, and 4 bps higher at 2, 5, 10 and 30 years, outperforming US Treasuries across the curve. US Treasury yields were up 15, 16, 12 and 8 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were 1% lower across the curve, ending the week at 65%, 59%, 59% and 84% at 2, 5, 10 and 30 years. AA Muni/AA Corporate ratios were 2% lower at 2 years, 1 % lower at 5 and 30 years and unchanged at 10 years to end the week at 64%, 58%, 56% and 76% respectively.
- For the weekly period ending April 10, municipal bond open end funds reported outflows of $395 million while ETFs reported inflows of $809 million.
- The muni new issue calendar is expected to be $8.03 billion this week.
Our take: US Treasury and municipal bond yields continued higher based on stronger than expected Consumer Price Index numbers. The timeline for Federal Reserve to cut Fed Funds rates has been pushed out substantially and the market is now expecting a 25 bp cut at the September FOMC meeting to be the only rate cut of 2024. Positive fund flows continue to support the rich relative value of municipal bonds to US Treasuries.
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