Weekly Fixed Income Commentary (March 20, 2025)
Economic Commentary
- In February, headline retail sales rose 0.2%, missing expectations for a 0.6% rise. The miss in headline sales was even worse when factoring in downward revisions to January data and adjusting for inflation. Retail sales ex-autos and ex-autos and gas performed better, rising 0.3% and 0.5%, respectively. Control group sales, which feed into GDP calculations, rose 1.0%, beating expectations for 0.4%. Adjusting for component-specific deflators, real retail sales were revised down to -1.7% in January, the biggest drop since December 2021.
- The University of Michigan Consumer Sentiment data registered a third straight month of declines, with the most recent reading extending across all three political cohorts (Democrat/Republican/Independent) amid universal weakening in future economic expectations. Consumer worries about losing their jobs are at levels normally seen during recessions, and consumer sentiment is declining rapidly both for households making more than $100,000 and less than $100,000.
- Data from the Fed shows that households’ ability to come up with $2,000 for an emergency expense within the next month is at the lowest level since the survey started in Q4 of 2015. Taking into account that the CPI level today is 35% higher than in 2015, the situation is even worse.
- The Federal reserve left rates unchanged and updated their Summary of Economic Projections (dot plots). It’s hard to overstate how central the theme of “uncertainty” was in the Fed communication. The policy statement, five sentences in, added, “Uncertainty around the economic outlook has increased.” By our count, Chair Powell used the word sixteen times during the press conference.
- In terms of tariffs, the Fed is operating under the assumption the 2025 tariffs will play out in a similar fashion to 2018’s, while keeping eyes open to the risk inflation lingers this time. In 2018, prices of individual products rose, but inflation did not increase. Tariffs had a bigger impact on growth than inflation. The Fed is not taking a repeat of that experience for granted, but it is the base case in the Fed’s forecast. If realized, rate cuts could resume more quickly than traders currently expect.
Our take: The market’s dovish response to the Fed has been warranted, as Chair Powell has once again reaffirmed a dovish bias. In attributing much of the expected rise in inflation to tariffs, referring to the current policy setting as “well positioned” and highlighting “uncertainty” so many times, this all leans toward a Fed that is prepared to act more aggressively should labor markets loosen rapidly. As we have been writing, the uncertainty around spending cuts, layoffs, tariffs and other changes is having the predictable outcome of causing consumers and companies to freeze or pull back, until more certainty arrives. It is possible that uncertainty and rapid changes will be the norm for months or even four years. But it is also possible that the tariff announcement set for April 2nd begins the process of some clarity. The Fed believes that inflation was on a good path before all of this chaos; if their view on tariffs being a one-time step up in costs, or transitory, rather than a persistent source of future inflation, then rates can eventually move lower. We are constructive on intermediate duration but expect some volatility along the way.
Corporate Bond Market Commentary
- IG spreads widened 5bp to +94bp and total returns were -0.26%.
- Fund flows were $-1.06 billion.
- 26 issuers priced $34.6 billion of supply, below expectations of $45 billion. New issue concessions rose to 9.6bps, well above recent trends. Books were 3.8x covered and attrition rates remained stable at 21%.
- HY spreads widened 28bp to +325bp and total returns were -0.66% (BBs -0.42%, Bs -0.76%, CCCs -1.47%).
- Fund flows were -$884 million, the first outflow after 9 weeks of inflows.
- New issue HY supply was $4.05 billion.
Our take: There is little doubt that real-time economic data shows a slowdown, whether it be airline bookings, retailer commentary, credit card data or other non-traditional data sources. Once the rules of the trade game become clearer, even if they are punitive or coercive, decision makers can spring into action and develop plans to compensate, work around, or factor in the costs, and investors can factor in these revenue and expense changes into their models. The selloff in bond prices has been somewhat uniform; once clarity on earnings and cash flow is incorporated into updated valuations, many of these bonds will prove to be undervalued, while others may still be too high. This normalization is when fundamental research-driven active management generates alpha.
Municipal Bond Market Commentary
- Muni and US Treasury yields once again moved slightly higher over the week ending March 14. AAA muni yields were up 6, 9, 13, and 20 bp at 2, 5, 10 and 30 years while US Treasury yields were up 2, 0, 1, and 2 bp at 2, 5,10 and 30 years.
- AAA Muni/Treasury ratios moved up 1% at 2 years, up 2% at 5 and 10 years, and up 3% at 30 years to end the week at 66%, 68%, 71% and 91% at 2,5,10 and 30 years. AA Muni/AA Corporate ratios were up 2% across the curve to end the week at 65%, 65%, 67% and 83% at 2, 5, 10 and 30 years.
- Municipal bond funds had outflows of $373 million for the weekly period ending March 12.
- Muni issuance is expected to be around $5.7 billion this week.
Our take: No real change in the outlook since last week; relative value remains high but as predicted last week gave up a little ground in the muni/Treasury ratio due to a lack of inflows. Municipal fund flows and issuance volume will dictate relative value over the near term as reinvestment dollars drop seasonally. Overall day to day volatility in the municipal market will continue to be driven by the volatility in the benchmark US Treasury market.
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