Economic Commentary
- Housing starts dipped to 1,311,000 in October, from 1,354,000, a bit below the consensus of 1,334,000. Building permits also fell slightly to 1,416,000, from 1,425,000, also a bit lower than the consensus of 1,435,000. New residential construction overall looks more likely to be a small drag on overall GDP growth in the coming quarters rather than make a significant contribution.
- Retail sales rose 0.4% in October, beating the 0.3% consensus. Excluding autos, sales rose 0.1%, two tenths short of the 0.3% consensus. Sales excluding autos and gas rose 0.1%, also two tenths below the 0.3% consensus. Control group sales, which feed into GDP, fell 0.1%, well below expectations for a 0.3% increase.
- September retail sales were revised significantly higher, lifting the level of October spending much higher despite the drop in some sales categories in the month. In September, headline retail sales were revised from 0.4% to 0.8%, ex-autos from 0.5% to 1.0%, ex-autos and gas from 0.7% to 1.2%, and control group from 0.7% to 1.2%. These are all unusually big revisions.
Our take: Over the next few months, long-term yields will fluctuate as the policy landscape becomes more clear. Whether tax cuts are offset by spending cuts and tighter immigration controls are offset by an easier path to legal work authorization will be the important questions that determine the inflation and deficit implications of future fiscal policy. The Fed has said they will wait and see on how they may have to consider fiscal policy in their monetary policy decision-making. The recent rise in interest rates brings them into better balance for the risks and uncertainties ahead, and investors seem to have drawn a line at 4.5% on the 10-year where absolute value is compelling.
Corporate Bond Market Commentary
- IG spreads widened 3bp to +80bp and total returns were -1.07%.
- Inflows were $691 million.
- New issuance was a robust $45.9 billion.
- HY spreads widened 9bp to +272bp and total returns were -0.44% (BBs -0.49%, Bs -0.41%, CCCs -0.30%)
- Inflows were a strong $3.635 billion.
- New issue supply was $4.29 billion.
Our take: The volatility around the election subsided a bit this week, and this rate stability brought out substantial new issuance ahead of the Thanksgiving holiday lull. The strategy teams of the large banks have started issuing their 2025 outlooks, and the broad range of views on rates and spreads is very telling; uncertainty abounds. Spreads are tight, supported by strong credit fundamentals and very favorable supply / demand technicals. All-in yields also support the bull case for credit. However, geopolitical uncertainty, domestic policy surprises, and a stretched lower and middle income consumer are all potential risks. Staying nimble and actively managing portfolios is a prudent way to navigate the volatility and uncertainty while also taking advantage of the myriad of opportunities which will undoubtedly present themselves over the coming weeks and months.
Municipal Bond Market Commentary
- The holiday shortened week ending November 15 saw far less yield volatility than the prior week. US Treasury yields rose while muni yields fell slightly across the curve. AAA muni yields were down 1, 1, 1, and 2 bp at 2, 5, 10 and 30 years while the US Treasury yields were up 5, 12, 14, and 15 bp at 2, 5, 10 and 30 years.
- Muni bonds outperformed Treasuries across the curve, moving AAA Muni/Treasury ratios unchanged at 2 years, down 2% at 5 and 10 years and down 3% at 30 years to end the week at 62%, 63%, 67% and 81%. AA Muni/AA Corporate ratios followed the same pattern of unchanged at 2 years, down 2% at 5 and 10 years and down 3% at 30 years to end the week at 64%, 61%, 64% and 76% at 2, 5, 10 and 30 years.
- For the period ending November 13 municipal bond funds had inflows of $305 million, marking 20 consecutive weeks of inflows.
- New issue supply is expected to be around $9 billion this week.
Our take: No major changes this week as markets continue to watch economic numbers, especially those related to employment and inflation, though the upcoming week is relatively quiet with regard to economic data releases. Potential impacts of the coming Trump administration are being analyzed as cabinet picks are announced. Municipal bond relative value supply/demand technicals continue to point to net demand with lower issuance, increased reinvestment dollars, and strong recent fund flows.
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