Weekly Fixed Income Commentary (May 8, 2025)
Economic Commentary
- April nonfarm payrolls rose 177k, the most since December. The rise was actually a little less than expected given a 58k net downward revision to February and March, which now stand at 102k and 185k, respectively, but because April was the month when tariffs were imposed and the survey week started before the 90-day pause, the fact that hiring strengthened matters more than newly discovered softness in Q1. Notably though 70k of the payroll growth was in the lower paying and less cyclical private education and healthcare universe, which has been a steady core of job growth throughout the last several years.
- Average hourly earnings rose 0.2%, a shade less than expected, likely because the job mix favored services over higher-paying goods producers. Year-on-year average hourly earnings growth fell from 3.83% to 3.76%.
- The ISM Services Index rose from 50.8 to 51.6 in April, beating expectations for a decline to 50.2. The index was boosted by better-than-expected increases in new orders and employment, which rose to 52.3 and 49.0, respectively. One of many points of concern, however, is the prices paid component, which rose from 60.9 to 65.1, nearly four points above the median estimate.
- OPEC+ announced plans for a 400k bpd production increase starting this week, putting further downward pressure on the price of oil.
- As expected, the Fed left interest rates unchanged yesterday, acknowledged rising risks to unemployment and inflation from tariffs, refused to wade into political fights, and emphasized a patient-but-nimble policy approach.
- The Treasury auction allotment data published yesterday showed no notable drop-off in foreign participation at the coupon auctions from two weeks ago. There’s not enough direct evidence suggesting foreigners offloaded Treasuries last month to explain the biggest market moves in early April.
Our take: Jerome Powell articulated a patient stance, which we believe is prudent. Until there is more certainty on trade policy, there is not enough clarity on the future direction of employment and inflation to adjust rates accordingly. Today’s outline of a deal with the UK may be the first of many, and the details (or lack thereof) will be important to understand where we are headed, and whether or not it may be too late to avoid some of the unintended and knock-on consequences of this period of prolonged uncertainty. We still believe rates will be rangebound over the coming weeks and months and plan to trade around these ranges and adjust duration accordingly.
Corporate Bond Market Commentary
- IG spreads widened 2bp to +106bp last week and total returns were -0.42%.
- Fund flows were -$1.506 billion, the ninth consecutive week of outflows.
- New issue supply was $38 billion across thirty-one issuers. Order books were 4.4x oversubscribed, driving new issue concessions to 3.8bps, below recent averages. Attrition picked up 8pts to 26% and spread compression from IPT to final pricing was 29bp.
- HY spreads tightened 7bp to +360bp and total returns were +0.29% (BBs +0.30%, Bs +0.18%, CCCs +0.53%).
- Inflows were a substantial $3.674 billion, the largest in 18 months.
- HY new issuance was $2.55 billion across four deals.
Our take: Corporate earnings have been a mixed bag, and many companies are withdrawing guidance due to tariff uncertainty. Between demand that was pulled-forward ahead of tariff implementation, to the ensuing period of uncertainty which has caused consumers and businesses to pause some of their activity, Q2 earnings should be worse for many companies. Beyond that, much will depend on how long the period of uncertainty lasts, and what the tariffs are once adjusted. All of this should drive dispersion and create winners and losers. We can’t wait for the future opportunities that will be created.
Municipal Bond Market Commentary
- Last week was just the opposite of the prior week, as muni yields fell and US Treasury yields rose across the curve for week ending May 2, 2025. AAA muni yields were down 6, 10, 10, and 10 bp at 2, 5, 10 and 30 years and US Treasury yields were up 8, 6, 7, and 9 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios fell 3% at 2 years and 4% across the rest of the curve to end the week at 76%, 77%, 77% and 92% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios fell 4% at 2 years, 6% at 5 years, 4% at 10, and 3% at 30 years to end the week at 76%, 73%, 72%, and 83% at 2, 5, 10, and 30 years.
- Municipal bond funds had inflows of $1.6 billion for the weekly period ending April 30.
- Muni new issue volume last week eclipsed already high expectations – over $19 billion in issuance was the most in 7 years. This week’s new issuance is expected to be ~$9.5 billion.
Our take: Strong inflows supported relative outperformance of the muni market in spite of a very large new issuance calendar. Nominal rates are still near multiyear highs, which should continue to draw investors to the market. As in recent weeks, 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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