Weekly Fixed Income Commentary (October 24, 2024)
Economic Commentary
- Existing home sales fell 1% last month to their lowest level in almost 14 years. The MBA mortgage purchase index has been close to its lowest since 1995 for the last year. After a momentary blip following the Fed’s rate cut, the refinance index is lower than any pre-pandemic week since 2000. Housing activity, or lack thereof, has a meaningful impact on the economy.
- According to yesterday’s Beige Book, the economy has stalled in 10 districts and modestly growing in two. Employment increased slightly in six districts and was flat in the remaining six. Inflation moderated. The most noteworthy takeaway from the national summary was, “Reports on consumer spending were mixed, with some districts noting shifts in the composition of purchases, mostly toward less expensive alternatives.” Like many other surveys, the Beige Book has reported notably weaker growth than activity measures feeding into GDP. Modest employment growth and moderating inflation fit the bill for an FOMC committed to easing.
- The Fed’s pre-meeting silent period begins at the end of this week, leaving only a few days for officials to shift market expectations away from a 25bp rate cut November 7, if they feel inclined.
Our take: UST rates have moved sharply higher over the last several weeks. There are several possible explanations, including that economic data has been stronger than expected, or markets are pricing in a greater probability of a Republican sweep of the elections and resultant deficit funded growth and tariff-fueled inflation that might follow. Our thinking is that the recent economic data is second tier, not yet a pattern, and has significant seasonal adjustments and low response rates embedded in it, so we are not yet ready to rely on it or call it a trend. As for the election, even when traders correctly anticipate election winners, they are often wrong about the economic and financial consequences. In addition, margins in both the House and Senate are likely to be thin no matter who wins the White House, so even controlling both parts of the legislature, neither candidate will find it easy to move legislation. This leads us to remain cautious about positioning and duration until there is more economic data to confirm a trend, which should start to arrive over the next few weeks.
Corporate Bond Market Commentary
- IG spreads tightened 1bp to +83bp, levels last seen in March 2005. Total returns were +0.14%.
- Fund flows were +$1.037 billion.
- New issue supply was $26 billion.
- HY spreads tightened 10bp to +288bp, levels last seen in June 2007. Total returns were +0.33% (CCCs +0.53%, Bs +0.36%. BBs +0.24%).
- Fund flows were +$923 million.
- New issue supply was $4 billion.
Our take: Spreads are very tight. Rates have moved sharply higher in the absence of substantial economic data, so all-in yields on higher quality bonds remain interesting, while lower rated bond yields have compressed too far. Patience should be rewarded here. Start to add a bit more duration but wait for more economic data before wholesale changes. Chasing a lot of lower quality bonds feels unwarranted if not reckless. Even if the economy avoids a harder landing, the risk/reward at these spread levels is poor.
Municipal Bond Market Commentary
- US Treasury and muni yields were down slightly for the week ending October 18. AAA muni yields were down 1, 1, 2, and 5 bp at 2, 5, 10 and 30 years while US Treasury yields were down 1, 2, 2, and 2 bp at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were unchanged at 2, 5, and 10 years and down 1% at 30 years to end the week at 63%, 64%, 67% and 83%. AA Muni/AA Corporate ratios were down 1%, 1%, and 2% at 2, 5, and 10 years, and were unchanged at 30 years to end the week at 64%, 62%, 64% and 78% at 2, 5, 10 and 30 years.
- For the period ending October 16 municipal bond funds had inflows of $1.8 billion, the 16th consecutive week of reported inflows.
- There is another large muni new issue calendar, expected to be $12.63 billion this week.
Our take: No real change in our outlook this week as markets continue to watch economic numbers, especially those related to employment and inflation, trying to divine signs of economic slowdown and the timing of future Fed rate cuts now that the easing cycle has begun. At this point the speed of FOMC rate cuts may be debated and it could be questioned whether the first cut should have been 25 or 50 bps, but there has yet to be any data so strong as to cause the FOMC to second guess the cutting cycle. Municipal bonds will be pressured by supply/demand technicals in the near term as heavy supply is expected to outpace reinvestment dollars and dealers report buyers are becoming tentative in the secondary market. This could be moderated by municipal fund inflows, which have been robust recently and historically strong during periods of economic slowdown.
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