Economic Commentary
- Treasury announced its financing estimates, projecting $740 billion in net privately held marketable borrowing in the Jul-Sep quarter, $107 billion below its previous estimates. Treasury also expects to borrow $565 billion in the October-December quarter. On a related note, Treasury left its quarterly issuance of longer-term debt unchanged for the second straight quarter, and maintained its guidance that it doesn’t expect to need to increase the amount of notes and bonds for several quarters. This is constructive for US treasury bond prices.
- June PCE inflation was mostly as expected, confirming the recent cool CPI report. The PCE deflator rose +0.1%, while the core rose +0.2%. Supercore (core services excluding shelter) rose +0.19% and remains consistent with broadening deceleration of inflation.
- In the JOLTS report, job openings were down from May’s revised 8.23 million figure to 8.184 million in June. Both were a bit above expectations. However, the ratio of openings for each unemployed job seeker is down to 1.2x, back to pre-pandemic levels.
- Personal income rose only +0.2%, down from a revised +0.4% in May and below expectations of +0.4%. Spending was +0.3% and May was revised higher from +0.3% to +0.4% as consumers are tapping out remaining savings to sustain spending, a pattern that is unlikely to persist.
- The Employment Cost Index, a preferred Fed indicator of wage inflation, rose +0.9%, down from +1.2% last quarter and below expectations of +1.0%.
- The ADP employment change was only 122k, below June’s upwardly revised 155k and below expectations of 150k.
- The Fed left rates unchanged for the eighth consecutive meeting but signaled that they are getting closer to cutting rates. September is officially a live meeting.
Our take: Labor market indicators continue to show slowing job growth and moderating wage inflation. This should hit consumer confidence and spending in the future. Consumers are already spending above income levels and drawing down savings, relying on the wealth effect from stock market gains and home price appreciation, both of which could reverse as well. The Fed is right to start cutting rates. All of this warrants an up in quality / longer in duration positioning to fixed income portfolios, which should also be seeing significant flows out of both equities and cash and providing a technical tailwind for bond prices.
Corporate Bond Market Commentary
- HY spreads were 1bp wider to +310 but lower UST yields drove total returns +0.31%. For the second straight week, lower quality CCCs outperformed BBs and Bs.
- Fund flows were strong for a third consecutive week at +$1.311 billion.
- $5.5 billion of new deals priced last week, up a bit from recent trends but still low enough to sustain favorable supply/demand technicals for the asset class.
- IG spreads were 2bp wider to +95bp and total returns were +0.16%.
- Fund flows were +$1.859 billion.
- $29.5 billion of supply priced last week and $25 billion is expected this week, largely front-loaded before the FOMC meeting.
Our take: Total returns have recently been positive but lagging the move in USTs as spreads are already tight. While the new issue supply has been light, it is starting to increase again as borrowers look to take advantage of lower rates. August can always be a bit of a treacherous month due to trader vacations and thinner liquidity, but now that the Fed is telegraphing its first cut, we fully expect a deluge of money flowing into fixed income funds. This will need to be put to work and will push bond prices higher, especially across intermediate duration investment grade. Those investors who have not yet begun to move cash from CDs and money market funds – what are you waiting for?
Municipal Bond Market Commentary
- The week ending July 26 saw US Treasury and municipal bond yields fall nominally. AAA muni yields were down 5, 6, 2 and 2 bps at 2, 5, 10 and 30 years. The AAA municipal bond curve underperformed US Treasuries at all but the 30-year tenor, with US Treasury yields falling 13, 9, and 4 bps at 2, 5, and 10 years and rising 1 bp at 30 years.
- AAA Muni/Treasury ratios were little changed, rising 1% at 2 years, unchanged at 5 and 10 years, and falling 1% at 30 years to end the week at 65%, 68%, 66% and 83%. AA Muni/AA Corporate ratios were 2%, 1% and 1% higher at 2, 5, and 10 years to end the week at 63%, 65%, 63% and 77% at 2, 5, 10 and 30 years.
- For the week ending July 24 municipal bond open-end funds had inflows of $450 million and ETFs had inflows of $415 million.
- The muni new issue calendar is expected to be around $9 billion.
Our take: While the US Treasury curve will probably provide the primary direction for muni yields, after several consecutive weeks of fund inflows and $34 billion of reinvestment principal and interest available to investors the first week of August, it’s likely that AAA muni/US Treasury ratios tighten over the near term.
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