Weekly Fixed Income Commentary (April 11, 2025)
Economic Commentary
- Employers added 228k jobs in March. Downward revisions to February and January payrolls meant the jump in March is less constructive than it appears. The unemployment rate ticked slightly higher from 4.13% to 4.15%, rounding up from 4.1% last month to 4.2% in March.
- Average hourly earnings rose 0.3% in March and were revised from 0.3% to 0.2% in February. Year-on-year earnings growth slowed from 4.0% to 3.8%.
- ISM Manufacturing fell to 49.0 in March, half a point below the consensus. Subcomponents point to stagflation on the goods side, with higher prices and slower growth and employment even before the new tariffs announced this week. ISM Services fell from 53.5 to 50.8, missing the consensus estimate of 52.9. New orders and employment both fell, indicating businesses are avoiding economic decisions. Featured survey responses mentioned government spending cuts more frequently than tariffs, which makes sense given services businesses are less directly impacted by goods costs and because the survey was conducted in March, before the biggest tariffs were announced.
- The February JOLTS report showed fewer job openings than expected, with marginally fewer quits and more layoffs.
- The NFIB small business optimism index fell from 100.7 to 97.4.
- CPI fell 0.1% in March, the first decline since last June. Core CPI rose 0.1%, significantly less than the 0.3% consensus. Energy prices fell 2.4%, mostly thanks to a 6.3% drop in gasoline. Food prices rose 0.4%. Within the core, transportation fell 1.8%. New vehicle prices rose just 0.1%, used cars and trucks fell 0.7%, and airfares fell 5.3%.
- Federal Reserve minutes certainly exhibited concern about the impact of tariffs, but emphasized a wait-and-see strategy until policy and data become clearer.
Our take: Economic data took a back seat to trade policy and liquidation-type behavior in the US Treasury bond markets. This week’s 10-year auction was perhaps the most widely anticipated one in a long time, and fortunately both the 10yr and 30yr auctions went smoothly. Going forward, if recession risk were to be lessened, then inflation risk may be higher, which makes long-duration less appealing. The front-end of the UST curve still has to price-out some rate cuts, so the 5-7-10 year portion of the curve would be a better place to focus. We took advantage of the recent slowdown-induced move lower in rates by reducing some duration but would look to add some back at higher levels and continue to trade the range.
Corporate Bond Market Commentary
- IG spreads widened 20bp to +114bp but the substantial move lower in rates drove total returns +0.34%.
- Fund flows were +$1.66 billion.
- New-issue supply was only $6 billion, below expectations of $20 billion amidst tariff uncertainty. Order books were 4x covered at higher new issue concessions of 7bp, and attrition was limited at 9%.
- HY spreads widened 98bp to +445bp and total returns were -2.02% (BBs -1.44%, Bs -2.19%, CCCs -4.25%).
- Fund flows were $894 million.
- New issue supply was $2.1 billion, but will be nil going forward until markets stabilize.
Our take: The massive gyrations in the bond markets since last Friday have created both risk and opportunity. We adjusted allocations by selling more rate-sensitive/higher quality bonds into strength and adding to some of our highest conviction lower credit quality positions on weakness, as the tariff tantrum created forced selling of risk. The abrupt pivot to a 90-day pause yesterday on tariffs caused a significant reversal in risk. We would anticipate selling some into strength, expecting that there will be more bouts of volatility as trade negotiations linger, and corporate earnings season begins in earnest. Volatility creates opportunity for actively managed funds.
Municipal Bond Market Commentary
- Municipal bond yields plunged as the 5-year BVAL AAA rallied 28bp, the 10-year dropped 30bp and the 30-year maturity rallied 29bp.
- Fund flows were $243 million out of mutual funds and $1.019 billion into ETFs.
- This week’s new issue calendar totals $11.8 billion.
Our take: This week, municipal bonds have underperformed already-weak USTs, and ratios have gapped substantially higher. The 10-year AAA muni ratio went from 74% on Friday to 88% as of yesterday’s close. As the municipal market gets past the current period of typical seasonal weakness (due to tax selling and accelerating supply) we expect a more constructive market backdrop as we approach the technically-stronger redemption season in June, July and August, with the acknowledgement that fiscal, tax and monetary policy changes will generate volatility over the coming weeks/months.
Important Information
Investors should consider a fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about a fund. To obtain a prospectus, visit www.sheltoncap.com or call (800) 955-9988. A prospectus should be read carefully before investing.
It is possible to lose money by investing in a fund. Past performance does not guarantee future results. Any projections or other forward-looking statements regarding future events or performance of markets, companies, or otherwise are not necessarily indicative or differ from, actual events or results.
INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.
