Weekly Fixed Income Commentary (June 26, 2025)
Economic Commentary
- Oil prices have declined from $75 to $65 as tensions with Iran have seemingly de-escalated.
- Fed governor Miki Bowman echoed Chris Waller’s comments that the Fed could ease as soon as the next meeting in July. This is notable because she has a hawkish track record and was the lone dissent last September when the Fed cut 50bp. However, Jerome Powell reiterated a patient stance in his congressional testimony. He did leave the door open for September when stating that tariff-induced price impacts should show up over the summer in June and July.
- New home sales were weak at 623k, well below the 693k estimate. April sales were also revised lower from 743k to 722k.
- Consumer confidence fell 5.4 points from 98.4 to 93.0 in June. The drop is significant because the present situation index fell more than the expectations index, and the present situation index is more highly correlated with retail sales and current consumption.
- The final revision to Q1 GDP was from -0.2% to -0.5%. The most significant revision was to consumption of services, which were revised from 1.7% to 0.6%.
- Headline durable goods orders were strong at +16.4%, but stripping out the volatile transportation segment the increase was only +0.5%.
- Initial jobless claims were 236k, but more concerning is the rise in continuing claims to 1.974 million, which could portend a weak non-farm payroll report next Thursday.
Our take: Recent economic data is mixed, and yet it still does not truly reflect the impact from tariffs because most companies stockpiled inventory ahead of time, or even if they did not, whatever goods they had on hand pre-tariffs took time to work through the system. This is why Jerome Powell expects to see the potential impact start to show up in June and July. Weakness in the labor market would be the one thing that could get the Fed to cut sooner or deeper, and the weak continuing claims data might be a harbinger. Just as inventory takes time to work through the system, companies’ headcount decisions also take time, as they wait to assess the amount, timing, and full impact of tariffs on their businesses. They hold onto labor as long as they can because it is hard to hire and train workers, but eventually if demand falters or margins are getting squeezed, they will have to cut costs and labor will be a target. Combined with the de-escalation in the middle east easing pressure on oil and inflation, treasuries could have a bit of room to run.
Corporate Bond Market Commentary
- IG spreads were unchanged at +88bp and total returns were a modest +0.23%.
- IG inflows were $930mm.
- New issue supply was only $17.8 billion. New issue concessions were 2.4bp, order books were 4.6x oversubscribed, attrition was 25%, and deals were tightened 29bp from IPT to final pricing levels.
- HY spreads were 5bp tighter to +313bp and total returns were +0.28% (BBs +0.21%, Bs +0.37%, CCCs +0.31%).
- HY inflows were $356mm.
- New issue supply was $8.925 billion, led by the $2 billion Level 3 and $3 billion X.Ai deals.
Our take: Another favorable week of technicals in the credit markets allowed both IG and HY to grind a bit higher. Rate-sensitive bonds don’t have much more room for spread tightening, so meaningful returns would come from coupon clipping and lower UST rates. For lower quality HY bonds, it will all come down to idiosyncratic drivers. Given the strong run of performance, and the complacency which has pushed implied volatility back to lower levels, we have added to our hedges. We also continue to expect gyrations when Q2 earnings reports come in and look forward to actively trading around these price moves. Lastly, the new issue calendar has been robust and we are diligently participating in many of these deals to further drive performance.
Municipal Bond Market Commentary
- The Muni and US Treasury yield curves both steepened slightly due to shorter rates moving lower over week ending June 20, 2025. AAA muni yields were -3, -3, -2, and -1 bps at 2, 5, 10 and 30 years and US Treasury yields were -4, -4, and -2 bps at 2, 5, and 10 years and unchanged at 30 years.
- AAA Muni/Treasury ratios were unchanged across the curve to end the week at 68%, 70%, 75% and 93% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios were up 1% at 2 years, up 2% at 5 and 10 years, and unchanged at 30 years to end the week at 67%, 68%, 73%, and 87% at 2, 5, 10, and 30 years.
- Municipal bond funds had inflows of $111 million for the weekly period ending June 18.
- The new issue calendar is smaller than recent weeks, with $11.9 billion in deals predicted for this week.
Our take: The muni market continues to perform well given the recent high issuance volume, digesting $9.5 billion last week in spite of the mid-week holiday. Inflows dropped but remain positive. Reinvestment income from called or matured bonds of $31.5 billion will be looking for bonds in the first week of July, which should provide strong support in the short term.
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