Corporate Bond Market Commentary
- Amid a quiet week with the July 4th holiday approaching, High-yield bond spreads are now at a year-to-date low as receding macro risks, resilient labor market data, and hawkish Fed comments prompted investors to reassess the Fed’s course of action. Spreads now sit at +429bps.
- Total returns for the week were +0.1%, led by CCC’s (+0.3%), B’s (+0.1%), and BB’s (+0.1%).
- Going into the holiday weekend, the primary market was quiet and is expected to remain so in this shortened week. For the month of June, $14.1bn of high-yield bonds priced following the stronger $21.7bn of issuance in May. High-yield issuance totals $95.6bn for the first half of the year which compares to $71.0bn at 1H22.
- CCCs for the month of June provided their largest gains since January (+3.3%), outperforming Single Bs (+1.77%) and BBs (+1.15%). This was the 3rd strongest month for CCC’s since Dec 2020. Yields and spreads were down 27bps and 65bps in June and are now 55bps and 82bps lower year-to-date. By rating, BB yields are now at 7.12%, B yields are 8.76%, and CCC yields are 14.22%.
Our take: It was a slow week going into the holiday and amid low volumes, HY spreads grinded tighter, absorbing the strong 10-year treasury yield move higher on Thursday. As we have said previously, the all-in yields offered by HY are attractive to many potential investors, and with plenty of cash on the sidelines, HY may continue to have support until a catalyst comes along changing the broader risk picture. This tightening dynamic may also have been bolstered by quarter-end rebalancing and investors putting money to work. That being said, while yields are substantial, spreads remain historically tight and the recent brightening macro narrative is far from certain. We continue to look for opportunities to trim risk at tighter levels if the rally sustains.
Economic Commentary
- FOMC minutes from the “pause” meeting last month were released today and were mostly in-line with expectations. They showed that most participants were in favor of leaving rates unchanged, although a few wanted a 25bps hike. Almost all believe an additional 50bps in hikes is necessary this year, with inflationary risks remaining skewed to the upside. The Fed will respond accordingly to economic data as it develops.
- Markets were mostly unfazed by upward revisions to the headline University of Michigan consumer sentiment index on Friday, which also showed no changes to the inflation expectations components. The ISM Manufacturing survey Monday showed price pressures and demand continuing to slow on the goods side of the economy.
- Investors will be looking towards the jobs report this Friday for the next potential game changing data point. With three weeks left before the next FOMC decision, markets are pricing in an 83% probability for a 25bps hike this month, with gradually increasing odds Fed policy will reach the 5.5%-5.75% terminal rate communicated by the June dot plot sometime this fall.
Our take: All eyes are on the jobs number Friday. The summer season has a history of volatility with low volumes and many investors not paying as close attention. If there is a substantial miss in either direction, the move could be swift. Last week, President Biden’s student loan forgiveness plan was struck down in the Supreme Court. While incrementally this should be deflationary as the cohort of payers who largely held out while the plan remained in limbo the past few years will now have less cash in their wallets, this decision was largely predicted and the market was unperturbed by the announcement.
Municipal Bond Commentary
- For the week ending June 30, 2023, high grade tax-exempt municipal bonds yields were 1 bps higher across the curve at 2,5,10, and 30 years, outperforming US Treasuries in the 2, 5, 10 and 30 year by 15, 15, 9 and 4 bps.
- Ratios were lower in the 2, 5, 10, and 30 year maturities, with AAA Muni/Treasury ratios ending the week at 59%, 63%, 66% and 92%. AA Muni/AA Corporate ratios finished the week lower in the 2 and 5 year, unchanged in the 10 year and higher in the 30 year at 60%, 60%, 60%, and 80% respectively.
- For the period ending June 21, tax-exempt funds reported outflows of $25 million.
- The new issue muni calendar of $840 million for the week is very light due to the Independence Day holiday falling midweek.
Our take: The high grade muni market held firm, nearly unchanged as US Treasuries sold off across the curve. No changes to our near term outlook for continued richness in the muni market over the summer months, as new issuance is expected to be well short of reinvestment dollars from called and matured bonds, providing strong technical support for continued richness in municipal bonds. Current visible net supply is -$21.3 billion.
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