Weekly Fixed Income Commentary (June 5, 2025)
Economic Commentary
- Weak readings in the May ADP and ISM Services indices spurred a bond market rally that pushed benchmark Treasuries past recent resistance levels. The moves partially reflect ongoing market sensitivity to evidence of a slowing economy. Short covering, particularly for longer-term Treasuries, added fuel to the rally once yields on 10s and 30s went below 4.40% and 4.90%, respectively. The latest data from the CFTC show asset managers increased their short positions in long-term Treasuries from 517k contracts as of May 20 to 612k as of May 27.
- The New York Fed surveyed its district’s businesses last month, finding both manufacturers and service firms passed through the bulk of new import levies to consumers, and quickly. Just under half of the service firms surveyed reported passing on 100% of tariffs, and almost 40% of all businesses passed them on within a week.
- ADP employment was weak, with an increase in private employment of just 37k in May following a 60k increase in April. ADP does not always track nonfarm payrolls, but when ADP is unusually weak, NFP usually weakens, too. In May, good-producing employment was unchanged, while service employment growth slowed to a crawl.
- The ISM services index fell unexpectedly from 51.6 to 49.9. New orders, at 46.4, were particularly weak.
- Only 27% of executives polled in May are confident about the economic outlook for the next 12 months, down from 47% in the first quarter and 67% in the fourth quarter. One in five business executives believe the US is already in a recession, while another 34% expect one by the end of the year, with 75% of those who are expecting a recession expecting it will be moderate to severe.
- The labor differential, jobs plentiful less jobs hard to get, fell to 13.2% in May, following a negative revision to the April report. The current level is down sharply from 22.2% in January, and close to the September 12.7% post-pandemic low. The level implies a 4.41% U3 unemployment rate and 8.13% U6 underemployment rate, above the U3 consensus forecast of 4.22% and high end of the range at 4.3%
- May car sales fell more than expected from a 17.27m annual pace to a 15.65m unit pace, well below the consensus 16.0m. While some of this is payback from front-running purchases ahead of tariffs, the trend bears watching closely.
- PCE inflation rose 0.118% headline and 0.135% core in April, pulling the year-on-year PCE inflation rate lower for a second consecutive month.
- Personal spending rose 0.2%, as expected, but real spending rose 0.1%, a tenth more than expected. The big surprise on the dollars-and-cents side, however, was personal income, which rose 0.8% in April, far more than the 0.2% consensus forecast, and was revised two-tenths higher, to 0.7%, in March. As a result, the saving rate was revised to 4.3% in March and rose to 4.9% in April. Big increases in farm income and Social Security accounted for the gains. Farm income has more than doubled since last year, while government social benefits have risen 11%.
Our take: We are getting closer to an answer as to whether weak soft economic data is predictive of hard data, which is lagging by nature, will follow and roll over; OR if the anemic soft data was a false alarm and will inflect and start getting stronger and catch-up to hard economic data. The tariff pause is nearly 2/3 over, with only the outline of 1 deal with arguably the easiest country achieved (the UK). Companies have generally taken a wait and see posture, rather than make definitive long-term decisions. At some point, price elasticity will reveal which companies have pricing power and which ones do not. Those that do not will have to find other ways to protect their margins by cutting costs, and that is when the labor market will soften further. US Treasuries are just starting to come around to this view, as the cumulative probability of a rate cut by September is now ~93% up from ~82% last week. The long end of the UST curve is being punished more by the lack of fiscal discipline in the tax and spending bill, as well as long end rate rises in Japan and other foreign countries. We expect UST rates to continue to trade within a range for the foreseeable future and investors can take advantage of this volatility by actively trading the range and/or adjusting duration and hedges.
Corporate Bond Market Commentary
- IG spreads tightened 2bp to +91bp and total returns were a strong +1.01%.
- Fund flows were +$1.01 billion.
- New issuance was only $21.6 billion across 21 issuers in the holiday-shortened week. New issue concessions compressed to 1bp, order books averaged 3.6x, attrition rose sharply to 27% and deals tightened by 28bp on average – all generally signs of a strong technical for the new issue market.
- HY spreads tightened 9bp to +331bp and total returns were +0.73% (BBs +0.66%, Bs +0.73%, CCCs +1.05%).
- Fund flows were +$602 million.
- The new issue supply was only $3.05 billion last week but has ramped up again in the current week.
Our take: The recent run of strong performance continues, largely driven by spread tightening until recently, when lower UST rates added to driving some total return. Complacency abounds in risk markets – equities and credit. Perhaps all of the uncertainty will be resolved smoothly, growth will re-accelerate without a resurgence of inflation, and all will be well. Conversely, there are many things that could interrupt the rally – complications in passing the tax and spending bill, expiration of the tariff pauses without sufficient progress made, geopolitical flare-ups, pre-announcements ahead of Q2 earnings season, and others. Adding risk was prudent amidst the chaos and uncertainty around the initial rollout of tariffs; trimming some risk after this solid rally also seems prudent. We expect continued volatility and look forward to all of the future credit investment opportunities that will be created for active credit-picking managers like ourselves.
Municipal Bond Market Commentary
- Yields fell across the entire municipal and US Treasury bond curves in the week ending May 30, 2025. AAA muni yields were down 8, 9, 5, and 2 bps at 2, 5, 10 and 30 years and US Treasury yields were down 9, 12, 11, and 11 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were unchanged at all but 30 years, where the ratio rose 1%, to end the week at 72%, 73%, 75% and 92% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios were lower at the front end, falling 2% at 2 years and 1% at 5 years, and were higher on the long end, up 1% at 10 years and up 2% at 30 years to end the week at 69%, 68%, 71%, and 86% at 2, 5, 10, and 30 years.
- Municipal bond funds had inflows of $526 million for the weekly period ending May 28.
- A very large new issue calendar is expected to bring $21 billion in deals this week.
Our take: The recent heavy muni supply is only picking up in volume, but high nominal yields continue to support steady inflows and re-investment dollars of $30 billion exceed the new issue calendar. One bullish indicator for municipals is call option open interest is at record levels for the largest municipal ETF. All financial markets will be closely watching the non-farm payroll numbers on Friday but continue to be subject to unpredictable headline risk driven volatility.
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