Weekly Fixed Income Commentary (June 27, 2024)
Economic Commentary
- Q1 GDP was revised from 1.3% to 1.4% — as expected — but there was considerable movement in the details. Consumer spending was revised from 2.0% to 1.5%, with durable, nondurable, and services spending all weaker than reported in either first or second releases. This weakness was offset by upward revisions to business-fixed and residential investment. Business structures in particular swung from -0.1% in the advance release to 3.4% in the final.
- Durable goods were considerably weaker than expected, with nondefense capital goods ex-aircraft orders falling 0.5% and shipments falling 0.6%. The advance goods trade deficit increased from -$98.0b to -$100.6B, while retail and wholesale inventories rose 0.7% and 0.6%, respectively.
- New home sales decreased significantly more than expected, with sales down 11.3% year-over-year versus an expectation of -0.2%.
- The Atlanta Fed GDPNow forecast was revised lower to 2.689%.
Our take: Both updated Q1 GDP and May data feeding Q2 GDP paint a picture of decent headline growth undermined by a weaker mix. Q1 final sales were little changed, but weak consumer spending is a red flag in a consumer-dominated economy like ours. As Chairman Powell has repeated recently, the risks of inflation and employment are becoming more balanced. At some point, if economic data continues to slow and indicate forward weakness, it may prompt the Fed to cut even if inflation progress isn’t as far along as their ideal scenario. Our tactical positioning is in line with these more balanced risks – high quality duration which would be resilient in an economic slowdown and generate capital appreciation as interest rates fall. The other side of this balance is not staying too long at the party on those lower quality credits which could be susceptible to impairment in a slowing economy.
Corporate Bond Market Commentary
- IG spreads leaked 1bp wider to +96bp, driving weekly total return losses of -0.31%.
- Fund flows were -$230 million.
- 23 issuers sold $31.4 billion of new issues
- HY bonds tightened 8bp to +321bp and weekly total returns were +0.23% driven by BBs (+0.27%) and Bs (+0.26%), while CCCs underperformed (-0.04%). This brings year-to-date performance to +2.60% (BBs +2.40%, Bs +2.51%, CCCs +3.69%).
- Fund flows were -$136 million.
- $3.35 billion of new issues priced in a lackluster week. Conversely, there were 35 leveraged loan transactions in the syndication process, continuing a red-hot trend.
Our take: Activity in the new issue market has slowed a bit, not surprising given seasonality and upcoming earnings blackouts. However, don’t take this as a sign that capital markets aren’t wide-open. They are. Hertz priced a rescue bond deal last week that was bathing in desperation, and it was upsized and traded up 3 points on the break. This continues to support one of our portfolio allocations – event driven trades where a catalyst will drive total returns, facilitated by these wide-open capital markets to finance any relevant component of transactions.
Municipal Bond Market Commentary
- The week ending June 21 was a slow week for data releases and subsequently saw little change to the yield curve. AAA muni yields were unchanged at 2 and 10 years and up 1 bp at 5 and 30 years. The AAA municipal bond curve slightly outperformed US Treasuries where yields rose 3, 4, 3, and 5 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were flat at 2, 5, and 30 years and fell 1% at 10 years, to end the week at 66%, 68%, 66% and 86% respectively. AA Muni/AA Corporate ratios were down 1% at 2 and 30 years and flat at 5 and 10 years, ending the week at 63%, 64%, 62% and 78% at 2, 5, 10 and 30 years.
- For the weekly period ending June 19, Lipper reported municipal bond fund inflows of $16 million.
- The muni new issue calendar is sizable with expectations it will be around $11.9 billion this week.
Our take: The US Treasury and muni market yields continue to be range bound. This week’s economic major economic releases include final Q1 GDP which came in right at the market expectation and PCE which will be released on Friday, and then the monthly employment numbers next Friday. We’ve got another large municipal new issuance calendar this week, so we expect some upward pressure on AAA muni/US Treasury ratios.
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