Weekly Fixed Income Commentary (August 22, 2024)
Economic Commentary
- The New York Fed’s SCE Labor Market Survey reported that 4.4% of workers currently employed expect to be laid off in the next four months, the highest level since the data began in July 2014. 28.4% of respondents said they had searched for a job in the past four weeks, the highest since March 2014. Satisfaction with wage compensation and nonwage benefits and promotion opportunities all deteriorated as well.
- The BLS New Tenant Rent Index went negative last quarter, which tends to lead the official indices by 9-12 months, indicating that shelter disinflation is very much in the pipeline.
- The Atlanta Fed GDPNow Forecast is down to +1.99% for Q3, down from +2.9% earlier in the quarter.
- Minutes of the July FOMC meeting revealed several members were actually in favor of cutting rates in July, and the vast majority observed that if the data continued to come in about as expected, it would be appropriate to ease at the next meeting in September.
- Payroll revisions of -818,000 for the 12 months ended March 2024 were shrugged off, largely because a large number was expected. It is still a significant change nonetheless, as average monthly payroll growth would have been 174k rather than 242k.
Our take: Yesterday’s Fed Minutes all but guaranteed the first rate cut at the September FOMC meeting. The vast majority of members believed it was appropriate back in July to cut in September, and we have only seen more supportive data since then. The market is pricing-in 100bp of cuts this year and another 120bp of cuts in 2025. It is important to remember that labor market indicators are lagging in nature, so anticipating the deterioration of the labor market and the resulting impact on consumer spending is crucial. The Fed will likely start with only 25bp in September but might have to pick up the pace in future meetings if data such as the NY Fed’s Labor Market Survey prove-out.
Corporate Bond Market Commentary
- IG spreads tightened 7bp to +98bp and total returns were +0.91%.
- $29 billion of IG new issues priced last week.
- Fund inflows into IG were +$1.1 billion.
- HY spreads tightened 20bp to +329.
- HY total returns were +0.74%, led by CCCs (+1.06%), Bs (0.76%) and BBs (+0.66%).
- $9 billion of new issue supply priced in HY last week.
- Fund outflows from HY were -$1.2 billion.
- Loan funds continued to bleed, with another -$669 million of outflows as investors pivot to fixed rate longer duration assets.
Our take: Supportive economic data has driven a strong bond rally over the last few weeks. Technical factors have been a tailwind, as fund inflows and a lighter new issue calendar converged. While the first interest rate cut is now firmly teed-up for September, the symbolism of the actual event as an all-clear sign for retail investors should unleash another tsunami of flows into bond funds, which will further support a rally in fixed income. However, if economic data continues to slow, and weakness at bellwether retailers such as Home Depot, Lowes, Macy’s, Williams Sonoma, and Urban Outfitters is a harbinger of future deterioration, then spreads could widen, particularly in lower rated credits. We continue to position our funds up in quality and longer in duration in anticipation of these trends playing out.
Municipal Bond Market Commentary
- Yields moved lower in both US Treasuries and municipals for the week ending August 16. AAA muni yields were down 2 bps at 2, 5, 10 and 30 years. The AAA municipal bond curve underperformed US Treasuries across the curve everywhere except 2 years, with US Treasury yields falling 0, 4, 6, and 8 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were up slightly at the long end, rising 1% at 10 and 30 years to end the week at 66%, 69%, 69% and 87%. AA Muni/AA Corporate ratios were up 1% at 5 years and up 2% at 10 and 30 years to end the week at 63%, 65%, 66% and 80% at 2, 5, 10 and 30 years.
- For the period ending August 14 municipal bond funds had inflows of $529 million, $296 million to open-end funds and $233 to ETFs.
- The muni new issue calendar is expected to be around $11.65 billion.
Our take: Most of the week was a continuation of the recent trend to lower yields, though most of the gains were given back after the stronger than expected retail sales numbers on August 15. With the FOMC minutes confirming a September rate cut is all but certain, the focus now turns to Chairman Powell’s speech at Jackson Hole on Friday. We anticipate a continuation of daily volatility oscillating around a trend line to lower yields.
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