Economic Commentary
- The March ISM Manufacturing index rose from 47.8 to 50.3, beating the 48.3 consensus expectation by 2 points and moving into expansionary territory for the first time since October of 2022. Upward momentum in recent months had stalled in February, but the trend since November 2023 is decidedly upward.
- February PCE rose +0.3% versus +0.4% expectations, pushing the YoY increase to 2.5%. January was revised up to +0.4% from +0.3%. Core PCE also rose +0.3%, which pushed the YoY measure down to +2.8%.
- Oil prices are back above $85 and the highest in two years, contributing to the move higher in yields.
- The March ISM Services headline index fell short of expectations but showed continued moderate expansion in the same range between 50.5 and 54.1 that has prevailed in the past year. Prices paid fell more than five points for the second consecutive month, from 58.6 to 53.4 in February, despite rising energy prices, an encouraging sign for services inflation that has been particularly sticky since the second half of last year.
Our take: Recent economic data has been mixed but shaded stronger. Despite the fact that Jerome Powell insists that these data points have been consistent with an eventual trend towards 2% inflation and thus on a path for rate cuts later this year, in order to have confidence in that path, one must believe that the economy will moderate rather than re-accelerate. Given how loose financial conditions have become over the last five months, it seems imprudent to be overly confident in such a direction. This is why our duration positioning has been defensive so far in 2024, and when markets either move to ~2 or fewer rate cuts in 2024 and/or ~4.5% on the 10-year UST, we would get more aggressive.
Corporate Bond Market Commentary
- IG spreads widened 1bp to +93bp and total returns were +0.14%, pushing returns for Q1 to -0.10%.
- Nineteen issuers sold $25.4 billion, pushing March to $142.2 billion, well ahead of the $130 billion expected, and Q1 to $529 billion, the largest on record. Estimates for April supply are $85 to $125 billion.
- Order books averaged 3.9x and new issue concessions were just 1.3bp.
- IG Fund flows last week were -$761 million.
- HY spreads widened 4bpn to +312bp and total returns were +.07%, pushing returns for Q1 to +1.49%. Across ratings cohorts, returns for the week were CCCs +0.2%, BBs +0.1%, Bs +0.1% and year-to-date CCCs 3.3%, BBs 1.1% and Bs 1.5%.
- New issue HY supply was $6 billion, bringing March to almost $27 billion.
- HY Fund flows were $1.397 billion.
Our take: Performance last week was uneventful, as continued new issue supply kept a lid on prices. Issuance should moderate over the next couple of weeks as we enter earnings blackouts, and therefore, markets will take direction from macroeconomic factors and then corporate earnings as they start to roll in. We still like positioning the portfolio with a combination of up-in-quality IG and BB bonds, combined with selective lower-rated Bs and CCCs, which we believe are mispriced and underappreciated by the market.
Municipal Bond Market Commentary
- The municipal bond index was lower for the third week in a row, posting a total return of -0.2%.
- Ratios were 63%, 59%, 59% and 85% in 1/5/10/30 years, higher by 2%/1%/1%/2% respectively.
- Fund flows were +$628 million, with ETFs taking in $667 million and mutual funds losing $39 million.
- This week’s new issue calendar totals $6.9 billion, of which $773 million is taxable.
- Demand should get a boost from the $17 billion of principal paid out this week from maturing and called bonds.
Our take: Three weeks in a row of negative performance and a modest negative performance for Q1 overall should put the muni market on notice for a tipping point on fund flows. Ratios remain rich, so the balance of factors favors caution until either rates back up to attractive levels and/or ratios become cheaper.
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