Weekly Fixed Income Commentary (July 2, 2025)
Economic Commentary
- Core PCE inflation of +0.2% surprised slightly to the upside but has still been low and trending in the right direction this year. PCE inflation rose just 0.136% in May, but because it fell in May last year, the year-on-year PCE inflation rate accelerated from 2.195% to 2.342%. The core rose 0.179%, lifting the y-o-y core rate from 2.577% to 2.677%.
- The unexpected -0.4% personal income decline was from a big fall in social security payments that reflected a reversion to normalcy after a policy-induced April spike. Inflation-adjusted personal spending of -0.1% was weak, but also partially a reversion to trend after consumers front-ran tariffs in prior months.
- June car sales fell to a 15.34mn annualized rate, a further pullback from the March/April increase.
- University of Michigan consumer sentiment improved slightly from 60.5 to 60.7 mainly due to current conditions improving as future expectations actually declined. Inflation expectations moderated somewhat from 5.1% to 5.0% for 1-year and from 4.1% to 4.0% for 5-10 years.
- Manufacturing PMI improved in the final June survey, rising to 52.9 from 52.0 in the June preliminary report.
- The May JOLTS report showed a mostly upbeat picture of the labor market. Job openings rose 5.1% m/m, the job-opening rate and quits rate both ticked higher, and the layoff rate fell from 1.1% to 1.0%.
- ADP employment change for June was a decrease of 33,000, below expectations of a 98,000 increase or a miss of 131,000, and the prior month was revised from +37,000 to +29,000.
Our take: Inflation readings have been favorable, but do not yet reflect the potential impact from tariffs. The Fed is waiting to get more clarity on this over the next few months. The only thing that would get them to move sooner would be more weakness in the labor market. After today’s ADP report, which is admittedly not the best predictor for payrolls, the stakes are raised for tomorrow’s nonfarm and private payroll numbers and for other near-term data points. At the same time as fundamental weakness might be suggesting rate cuts, the UK political chaos is once again spiking gilt rates, and dragging long-duration US Treasuries and other sovereigns higher. As the fate of the One Big Beautiful Bill hangs in the balance, we don’t think we are out of the woods on further gyrations in US Treasuries from both technical factors and renewed concerns of bond vigilantes over fiscal profligacy. This conflict between fundamentals and technicals may not be resolved for some time. Our view is to trade the range on USTs and protect against large moves with out of the money hedges.
Corporate Bond Market Commentary
- IG spreads were unchanged at +88bp and total returns were +0.68%.
- IG fund flows were +$1.813 billion.
- IG new issuance was $36.9 billion across 26 issuers, the largest total since mid-May. New issue concessions were 2.9bp, books were 3.7x covered, attrition was 26% and deals were tightened 30bp on average from initial price talk to final pricing, all generally consistent with recent trends and reflective of a healthy market.
- HY spreads were 11bp tighter to +302bp, levels last seen in March. Total returns were +0.80% (BBs +0.77%, Bs +0.72%, CCCs +1.26%).
- HY fund flows were +$1.769 billion.
Our take: The yield on the BB index has dropped to 5.95%, the lowest since September 2024 and offering only 71bps of pickup over BBBs. There is no coincidence that issuance in June was almost $33 billion, the busiest month since September 2024. Issuance should continue at a healthy clip, driven by continued refinancing of 2026-2027 maturities. We are cognizant that spreads are tight, interest rates are vulnerable to spikes, and complacency abounds. At the same time, we are heading into earnings season which should bring plenty of surprises and the height of summer vacation season which brings lower trading volumes and less liquidity. All in all, we have credit risk hedges in place to protect some downside, and some cash ready to deploy into single name dislocation.
Municipal Bond Market Commentary
- Bonds rallied with both Muni and US Treasury rates moving lower across the curve during the week ending June 27, 2025. AAA muni yields were -4, -5, -4, and -2 bps at 2, 5, 10 and 30 years and US Treasury yields were -16, -13, -10 and -5 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios moved slightly higher, up 2% at 2 years, up 1% at 5 years, unchanged at 10 years and up 1% at 30 years to end the week at 70%, 71%, 75% and 94% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios were unchanged at all but 30 years where the ratio rose 1% to end the week at 67%, 68%, 73%, and 88% at 2, 5, 10, and 30 years.
- Municipal bond funds had inflows of $77 million for the weekly period ending June 25.
Our take: The muni market lagged Treasuries but delivered positive returns in spite of the recent high issuance with June ’25 volume up 20% compared to June ’24. Inflows were lower than the previous week but remain positive, which combined with reinvestment income from called or matured bonds estimated to be $33 billion hitting the market this week should provide strong relative performance.
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