Weekly Fixed Income Commentary (September 18, 2024)
Economic Commentary
- Retail sales rose +0.1% in August, higher than the -0.2% estimate. July was revised higher as well. Control group sales rose +0.3%, in line with expectations but essentially higher when considering the upward revision to July. Spending on cars, furniture, gasoline, and food & beverage stores fell, while non-store retailer and general merchandise sales were higher.
- The Federal Reserve cut interest rates by a half point from 5.25%-5.50% to 4.75%-5.00%.
Our take: The Fed is confident inflation is moving back down to 2%, and the balance of risks has shifted towards the labor market. By showing only a 0.2% further increase in the unemployment rate from current levels to their cycle peak of 4.4%, the FOMC is telling us that they will be aggressive in protecting the labor market. Jerome Powell even made the comment that there is a school of thought that the best time to protect the labor market is when it is strong, rather than when it’s weak. This should support the short and intermediate portion of the yield curve, while the long end of the curve will also be influenced by concerns around terminal rate, profligate deficit spending, and other more theoretical issues. Positioning in the intermediate portion of the curve should offer the best risk/reward for the rate cut cycle which is now officially underway.
Corporate Bond Market Commentary
- IG spreads were unchanged at +99bp but lower UST yields drove total returns +0.57%.
- Fund flows were -$1.85 billion.
- New issue supply was $38.2 billion.
- HY spreads tightened 2bp to +337 and total returns were +0.43% driven by CCCs again (+1.06%), while BBs (+0.40%) and Bs (+0.25%) lagged.
- Fund flows were +$747 million.
Our take: New issue supply continues to be easily absorbed, which should encourage borrowers to continue to access the debt markets. Spreads remain at cycle tights even though the economy has begun to slow, and the rate cut cycle is underway. While aggressive rate cuts might support lower-rated credit, the downside risks into a slowing economy require strong underwriting in this stratum of the high yield market. We still believe that up in credit quality positioning along with duration is most appropriate at this point in the cycle.
Municipal Bond Market Commentary
- Yields moved slightly lower in US Treasuries and municipals for the week ending Sept. 13. AAA muni yields were down 2 bps at 2 and 5 years and unchanged at 10 and 30 years. The AAA municipal bond curve underperformed US Treasuries across the curve, with US Treasury yields falling 6, 5, 6, and 4 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios rose 1% at 2, 5, and 10 years and were unchanged at 30 years to end the week at 67%, 70%, 72% and 89%. AA Muni/AA Corporate ratios were up 2% at 2, 5, and 30 years and unchanged at 10 years to end the week at 64%, 66%, 66% and 82% at 2, 5, 10 and 30 years.
- For the period ending Sept. 11 municipal bond funds had inflows of $1.26 billion, the 11th consecutive week of reported inflows.
- The muni new issue calendar is expected to be around $8.0 billion this week.
Our take: Fixed income markets will continue to watch economic numbers closely, especially those related to employment and inflation, to try to divine the timing of future Fed rate cuts now that the easing cycle has begun. The next several months are expected to bring higher than normal municipal issuance, but timing and volume could be volatile as issuers weigh the potential impacts of the November elections. Recent inflows have been strong and are likely to continue as economic slowdowns have historically led to greater municipal fund inflows.
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