Weekly Fixed Income Commentary (March 13, 2025)
Economic Commentary
- The February NFIB small-business optimism index slipped from a four-year high 102.8 to 100.7. The NFIB notes a sharp decline in business expansion plans, with concern highest among companies reliant on exports and companies doing business with the federal government.
- Nonfarm payrolls rose 151k in February, about as expected, but with noise in the details suggesting weakness, especially in government and in private services, not evident in the headline. January payrolls were revised 22k lower, from 143k to 125k, but December was revised up 20k, leaving the net two-month revision at just -2k. Government hiring rose 11k, with 10k job losses at the federal government and 21k additions on state and local payrolls. Federal job cuts showing up in payrolls likely reflect normal attrition — retirement and the like — not offset by new hires given a federal government-wide hiring freeze. The big layoffs in February may not affect payrolls because those who chose to leave are still being paid as if they are still on the books until September. Private service producers added 106k, a weak showing after the storm-depressed 88k rise in January. The biggest increase was in education and health, up 73k. Leisure and hospitality payrolls fell 16k after a 14k drop in January. Trade and transport and financial services each added 21k jobs, big gains for those categories. Professional and business services fell 2k on the heels of a 39k drop in January. These could be jobs related to DOGE cuts. There was a lot less money flowing from the government to NGOs and consulting firms in February.
- Average hourly earnings rose 0.3% to $35.93, after a 0.4% rise in January. The year-on-year growth rate of average hourly earnings rose from 3.9% to 4.0%. Earnings growth, which fell from 6.0% in late 2022, appears to have bottomed, for now at least.
- In the household survey, employment fell 588k, while the labor force fell 385k, resulting in an unemployment rate rising from 4.011% in January to 4.139% in February. The underemployment rate jumped from 7.5% to 8.0%, mostly due to a rise in marginally attached workers. The participation rate dropped from 62.6% to 62.4%.
- Challenger reported 172k job cut announcements in February, the highest since July 2020 and the most for a February since 2009.
- The CPI rose 0.2%, headline and core in February, a better-than-expected result. By far the most important takeaway is when February PCE inflation is reported in a couple of weeks, like January, it should rise less than it did a year ago. As a result, the year-on-year rate should fall again.
Our take: Economic data that was collected in January or February is now considered stale, because so much has changed since then. Spending cuts and layoffs at the Federal Government level, significant changes to trade policy and tariffs, and a meaningful drawdown in equity markets. We do believe that calmer inflation readings leading up to March are constructive, all else considered, but as we have been writing, it will take some time for some clarity to emerge on the direction of the economy, employment, and inflation. The most tangible real-time indicators we have seen in the last week are airlines cutting their forecasts for Q1 citing a sudden reduction in domestic business and leisure bookings on account of uncertainty and declining confidence, and also by retailers who are also seeing a meaningful reduction in traffic and sales over the last few weeks. We have been adamant that businesses like clarity and loathe confusion and uncertainty and will freeze or cut back on spending until more clarity emerges. Many investment banks are cutting their forecasts for GDP growth and increasing probabilities of a recession. High quality short and intermediate duration should be the beneficiary of a slowing economy and risk-off behavior.
Corporate Bond Market Commentary
- IG spreads widened 1bp to +89bp and total returns were -0.66%.
- Fund flows were +$2.042 billion.
- 30 issuers tapped the market in the largest week of new issuance since Labor Day 2024 as $73.2 billion priced including Mars’ $26 billion deal. Concessions increased to 4bp, book coverage remained at 3.5x but this was skewed by the Mars 40y tranche at 12.8x. Estimates for this week were $45 billion, but volatility has caused many issuers to stand-down.
- HY spreads widened 10bp to +297bp and total returns were -0.30% (BB -0.16%, Bs -0.31%, CCCs -0.88%).
- Fund flows were +$2.206 billion, continuing the streak of strong inflows.
- New issue supply was $8.15 billion.
Our take: Spreads have finally started to crack. Markets hate uncertainty, and we have been getting a steady diet of it for the last several weeks. Companies are giving us real-time indications that business is cooling. How deep the drop-off is and how long it persists will obviously determine if this is a brief pullback or an extended drawdown. The weakness has been most pronounced in lower-rated bonds, as expected. However, the selling has been somewhat indiscriminate and in unison. This lack of discernment among individual companies and bonds creates future opportunities for returns and outperformance for fundamental credit pickers who can discern the winners from everything else.
Municipal Bond Market Commentary
- Muni and US Treasury yields moved slightly higher over the week ending March 7. AAA muni yields were up 2, 6, 7, and 11 bp at 2, 5, 10 and 30 years while US Treasury yields were up 1, 7, 9, and 11 bp at 2, 5,10 and 30 years.
- AAA Muni/Treasury ratios moved up 1% at 2, 10, and 30 years and were unchanged at 5 years to end the week at 65%, 66%, 69% and 88% at 2,5,10 and 30 years. AA Muni/AA Corporate ratios were unchanged at 2 and 30 years, up 1% at 5 years and up 2% at 10 years to end the week at 63%, 63%, 65% and 81% at 2, 5, 10 and 30 years.
- Municipal bond funds had inflows of $872 million for the weekly period ending March 5.
- Muni issuance is expected to be around $7.9 billion this week.
Our take: No real change in the outlook since last week, as positive fund inflows continue to support the rich relative value of municipal bonds, but this could be challenged over the next several months as reinvestment dollars drop seasonally. Day to day volatility in the municipal market continues to be driven by the volatility in the benchmark US Treasury market.
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