Weekly Fixed Income Commentary (March 6, 2024)
Economic Commentary
- The February ISM Manufacturing index fell from 49.1 to 47.8, missing expectations of 49.5 by nearly 2 points. The manufacturing side of the economy has been in contraction for over 18 months, and upward momentum in recent months has been painfully slow to develop.
- The February ISM Services index fell from 53.4 to 52.6, below the 53.0 consensus. After a stronger than expected pop in January, the index cooled in February, primarily driven by declines in the employment and supplier delivery components.
- Atlanta Fed President Raphael Bostic pushed back against rate cut expectations, saying he expects just one cut now — in the third quarter — followed by an extended pause. This is notable as he has been quite dovish.
- Chairman Powell is on Capitol Hill delivering his semi-annual Humphrey Hawkins testimony. As of writing, he is not breaking new ground, and is reiterating the Fed’s message of patience and seeing more confidence inflation is on track to 2% before cutting rates.
Our take: The Fed is not in a rush, and we are coming around to taking the under on 3 rate cuts this year. As we have been saying recently, we have been patient on adding additional duration, which has served us well so far in 2024, and will look to add duration if market pricing comes around to 3 or fewer cuts this year and/or rates back up closer to 4.5%.
Corporate Bond Market Commentary
- US High Yield widened 9 bp last week to an OAS of 332 bp. On a total return basis, US HY rose +0.2% on a second consecutive week of robust outperformance from CCCs (+1.4%) versus Bs (+0.2%) and BBs (-0.1%). On a YTD basis, US HY is +0.5% with CCCs (+2.2%) leading Bs (+0.6%) and BBs (flat).
- US HY primary markets were relatively active again last week bringing the February total to ~$27 billion. YTD issuance now totals ~$58 billion.
- HY funds saw outflows of $1.183 billion.
- IG spreads widened 6bp to +101 and total returns were +0.18%.
- 36 IG issuers priced $53.1 billion of new issues, well ahead of expectations for $35 billion. Order books averaged 3.9x and NICs averaged 4bp. Expectations for March show a deceleration to $130 billion, including $25-$35 billion this week.
- IG funds saw inflows of $967 million.
Our take: Corporate bond markets continue to absorb massive amounts of new issue supply, with minimal indigestion. Deals this week have generally not performed well as issuers and underwriters get even more aggressive on pricing, but the deals are getting done, and the market continues to be wide open. We have the luxury to play only the deals that we like, rather than needing to buy most of them to put money to work chasing indices. The song remains the same – spreads are tight, but all-in yields are attractive, which suggests a coupon-type return year. We believe there will be volatility, dispersion, and downside surprises, and expect to take advantage of our tactical mandate to actively manage around potholes and into attractive opportunities that are created along the way.
Municipal Bond Market Commentary
- For the week ending March 1, the high grade tax-exempt municipal bond yield curve was 1 bp lower at 2, 5, and 30 years, and 2 bps lower at 10 years, lagging US Treasuries across the curve. US Treasury yields were down 15, 11, 5 and 3 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios showed slightly cheaper munis at 2 and 5 years with ratios up 2% and 1% respectively, and unchanged at 10 and 30 years, ending the week at 62%, 59%, 60% and 85% at 2, 5, 10 and 30 years. AA Muni/AA Corporate ratios were 1% richer at 2 years and unchanged elsewhere to end the week at 60%, 56%, 54% and 76% respectively.
- For the period ending February 28, municipal bond open end funds reported outflows of $277 million while ETFs reported inflows of $350 million.
- The muni new issue calendar is expected to be about $8.0 billion this week.
Our take: US Treasury and municipal bond yields remained range bound over the last week. With monthly nonfarm payroll and Chairman Powell’s Humphrey-Hawkins testimony this week market participants continue to watch economic data and Fed commentary for catalysts to move the US Treasury curve. Positive net supply and fund flows continue to support the rich relative value of municipal bonds to US Treasuries.
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