Weekly Fixed Income Commentary (September 26, 2024)
Economic Commentary
- Oil has slumped on the prospect of higher supplies from Saudi Arabia compounding concerns about weaker demand as global economies slow. The Kingdom is ready to abandon its unofficial price target of $100 to regain market share, the FT reported, as it and other OPEC+ members prepare to pump more crude from early December. On the flip side, this should provide more confidence around the inflation picture and allow the Fed to continue cutting rates.
- The labor market metrics in the consumer confidence report are consistent with the unemployment rate approaching 5%, rather than the 4.4% cycle peak embedded in the FOMC dot plots, according to David Rosenberg. The employment report on October 4th is an important upcoming anchor for interest rates.
- Many economists are not placing much weight on the consumer confidence survey lately, considering the broken relationship between sentiment and economic behavior over the last few years. However, the focus has correctly been on the report’s 12.1 labor market differential (defined as those reporting jobs are “plentiful” minus those reporting jobs are “hard to get), the lowest reading since March 2021.
- China announced coordinated stimulus including a mortgage rate cut, a cut in the required reserve rate, removal of second home buying restrictions, and $113 billion of liquidity support including loans for companies to buy back their own stock. Commodities had a brief bounce, but quickly realized this is just a few more drops in the bucket and not likely to significantly improve supply and demand.
Our take: The recent rate move higher is just a modest retracement after a significant move lower over the last several months. Historically, the long end of the UST curve always sells off in the aftermath of the first rate cut on the mistaken belief that inflation will be revived. Then reality sets in and yields resume their move significantly lower. Keep in mind that much of this move has been in the absence of any first-tier economic data. Look to add more duration in the coming days and weeks into this weakness
Corporate Bond Market Commentary
- IG spreads tightened 6bp to +93bp and total returns were +.07%.
- IG fund inflows were +$1.232 billion.
- New issue supply was only $12.4 billion last week, well below expectations of $25 billion.
- HY spreads tightened 22bp to +315bp and total returns were +0.80%. Across rating tiers, weekly returns were led by CCCs (+2.13%), followed by Bs (+0.73%) and BBs (+0.53%).
- HY fund inflows were $1.323 billion, the largest since mid August.
- HY new issue supply was $4.775 billion.
Our take: After a lighter calendar last week, there has been a flood of issuance this week, weighing on secondary prices for several straight days of losses in the HY market. So far this week 15 borrowers sold $8 billion of HY bonds, driving the month’s tally to $33 billion, the busiest September since 2021 and up 39% from last year. Deals are still getting done, with books well oversubscribed and pricing tightened, but the effect on secondary prices despite fund inflows is noteworthy. HY has had a great run along with the risk-on sentiment in the equity market. Usually, September is a tricky month for these reasons. We are actively trading the new issue market and keeping some dry powder as weaker secondary prices invite some discount shopping in the days and weeks ahead.
Municipal Bond Market Commentary
- Yields moved slightly higher in US Treasuries and were essentially unchanged in municipals for the week ending Sept. 20. AAA muni yields were unchanged at 2, 5, and 10 years and down 1 bp at 30 years. The AAA municipal bond curve outperformed US Treasuries across the curve, with US Treasury yields rising 1, 7, 9, and 10 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were flat at 2 years and down 2% at 5, 10 and 30 years to end the week at 67%, 68%, 70% and 87%. AA Muni/AA Corporate ratios were mixed, up 1% at 2 years, down 2% at 5 and 30 years and flat 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. 18 municipal bond funds had inflows of $716 million, the 12th consecutive week of reported inflows.
- The muni new issue calendar is expected to be substantial at $14.3 billion this week
Our take: There is no change to last week’s sentiment that 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 couple 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 let to greater municipal fund inflows.
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