Weekly Fixed Income Commentary (April 30, 2025)
Economic Commentary
- The April University of Michigan survey showed slightly less pessimistic readings than the preliminary release two weeks ago. Inflation expectations remain high, but did not worsen.
- The Dallas Fed manufacturing activity index declined -35.8 versus estimates of -17.0 and the prior month’s -16.3, and the services activity index declined to -19.4 from -11.3, in a continuation of the soft and concurrent economic data rolling over.
- Mark Carney and the Liberal Party won the Canadian election, but without a majority of seats. The Liberals will likely have to caucus with the Bloc Quebecois, which will restrict Carney’s leadership options. If he is forced to form a coalition government, he will be motivated to keep Canadian anger against the US at a boil, as demonstrated by his victory speech, which centered on American betrayal.
- Core capital goods orders rose a meager 0.1% in March after a 0.3% decline in February, suggesting some investment paralysis on the part of US firms. Non-defense goods shipments including aircraft fell 1.9%.
- According to JOLTS data, the March labor market had very low rates of hiring and job separations, sufficient to avoid spiraling layoffs but not exactly describing a private sector ready to absorb anyone displaced by tariffs or federal layoffs.
- Q1 GDP came in at -0.3%.
- The GDP price index and the Core PCE price index were both stronger than expected and offer a concerning outlook on tariff-induced price pressures ahead. Q1 employment costs came in line with expectations, which brought the year-over-year rate down to a four-year low of 3.6%. The softening labor backdrop amid the trade war is one reason why we think the goods inflation caused by tariffs will have limited spillovers into services.
- The Conference Board’s consumer confidence fell from 92.9 to 86.0. The present situation index is at the lower end of its four-year range at 133.5, but the expectations index fell to 54.4, its lowest since 2011.
Our take: Today’s GDP figures indicate a stagflationary trend leading up to the April 2nd tariff announcements. The hard data has held up ok on pre-buying ahead of price increases and empty shelves, while the soft data has rolled over. We won’t know the true impact for weeks if not months, when the sticker shock really hits, and the potential stark images of product shortages and empty shelves become a reality. Until then, uncertainty will continue to create volatility and trading ranges. Next week’s Fed meeting will bring no rate cut, but the press conference should be interesting given the pressure being put on Chair Powell and the independence of the Fed. Markets are currently pricing in a 62% probability of a cut in June, which feels like too soon, and 4 total cuts in 2025, which feels like too many. The Fed will likely want to see clear evidence that either tariff-induced inflation is not materializing and/or the economy and labor market is really slowing, and we don’t think there will be enough clear evidence of this until later in the summer.
Corporate Bond Market Commentary
- IG spreads were 7bp tighter to +104bp and total returns were +1.02%.
- New issue supply was $28.8 billion across 14 issuers. Order books averaged 4.3x, concessions were 4.2bp, and attrition was 18%, all generally in line with year-to-date trends.
- Fund flows were -$2.444 billion, the seventh straight week of outflows.
- HY spreads were 35bp tighter to +367bp and total returns were +1.24% (BBs +1.05%, Bs +1.26%, CCCs +2.13%).
- New issuance was $4.4 billion across only three deals (Jane Street, QXO/Beacon Roofing, and Excelerate Energy).
- Fund flows were -$1.339 billion, a moderation from the heavier outflows of the previous two weeks, but still the fourth consecutive week of outflows.
Our take: US high yield bonds had their best weekly performance in 16 months, as investors were reassured by signs of the de-escalation of trade tensions and prospects of further rate cuts. Trading technicals improved as outflows moderated and then turned to modest daily inflows late in the week, while new issue supply remains muted and coupon and principal payments add to decent mutual fund cash balances. If expectations for near-term progress on trade deals does not materialize, or earnings season delivers more negative surprises, the recent relative calm could easily turn negative again.
Municipal Bond Market Commentary
- Muni yields rose and US Treasury yields fell across the curve for the week ending April 25, 2025. AAA muni yields were up 3, 3, 2, and 1 bp at 2, 5, 10 and 30 years and US Treasury yields were down 5, 8, 9, and 10 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios rose 2% across the curve to end the week at 79%, 81%, 81% and 96% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios rose 3% at 2 and 5 years and rose 2% at 10 and 30 years to end the week at 80%, 79%, 76%, and 86% at 2, 5, 10, and 30 years.
- Municipal bond funds had outflows of $397 million for the weekly period ending April 23.
- Muni new issue volume is expected to be ~$14.7 billion this week.
Our take: Though the pace of outflows has slowed, it continues beyond tax day. Add last week’s heavy issuance calendar, which at $16 billion was larger than expected, and the muni market lags US Treasuries. Muni/US Treasury ratios and nominal rates are at multiyear highs, which should help draw investors to the market. A calm US Treasury market would also help, but we remain subject to headline driven short term volatility as long as the trade war persists.
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