Economic Commentary
- March car sales came in at 17.8mn, the highest since April 2021. Consumers sped up purchases to front-run expected tariffs, so teasing out underlying spending strength remains difficult.
- Manufacturing PMI for March increased to 50.2 in the final report, up from 49.8 in the flash but down from 52.7 in February, with the ISM index painting a similar picture, dropping to 49.0 in March from 50.3 in the prior month. The price indexes on the surveys have continued to surge amidst the wave of tariff announcements, with the ISM prices paid index now at its highest since the summer of 2022.
- The JOLTS report was slightly weaker than consensus but the job opening rate and the ratio of vacancies to job seekers have largely held constant since mid-last year.
- The ISM Manufacturing Index fell from 50.3 to 49.0, half a point below the consensus estimate. The subcomponents will encourage talk of stagflation, with the prices paid component rising to 69.4 and the new orders and employment components falling to 45.2 and 44.7 respectively.
- The ISM Services Index fell from 53.5 to 50.8, well short of a consensus estimate of 52.9. New orders and employment both missed estimates, with employment falling 7.7 points to 46.2, well into contractionary territory.
- President Trump unveiled reciprocal tariffs in a Rose Garden ceremony, and they were higher than expected. The base is a 10% tariff on all imported goods. Additional tariffs were imposed based on a ratio of the trade gap with individual countries to the total trade with those countries.
Our take: The initial reaction to the breadth and rates of tariffs has been significant. What remains to be seen is whether these are the high mark starting point to be negotiated lower, or whether retaliation pushes the rates higher still. The uncertainty leading up to this has caused a slowdown in economic activity as businesses and consumers held back, and this should continue to show up in the hard data over the coming weeks and months. Interest rates have moved lower, reflecting this anticipated economic slowdown and a flight-to-quality bid for US Treasuries, and 4 Fed interest rate cuts are now priced-in for 2025. The ‘stag’ portion of stagflation has been winning the tug of war over the last few days; there will likely be other days where the ‘flation’ side of the equation gets the upper hand. Trimming a bit of duration is a prudent move, which we have done a bit at the front end and a bit at the long end, maintaining exposure in the belly of the curve.
Corporate Bond Market Commentary
- IG spreads were 2bp wider to +94bp and total returns were -0.17%.
- Fund flows were -$805 million.
- New issue supply was $41.2 billion, with new issue concessions rising modestly to 4.5bp, order books were 3.3x oversubscribed and attrition rates were back to 19%.
- HY spreads were 26bp wider to +347bp and total returns were -0.50% (BBs -0.45%, Bs -0.57%, CCCs -0.52%).
- Fund flows were +$45 million.
- New issuance was $9.52 billion, led by the Bausch $4.4 billion deal and the Novolex deal.
Our take: Investment grade bonds held-in well, and BB high yield bonds have also been resilient, while high-beta or tariff exposed single Bs, and most all CCCs have sold-off. This decompression is typical in a risk-off environment. We have not yet seen massive HY fund outflows which would cause more significant dislocation even in BBs. Once we get a bit of stability on the macro front, certain Bs and CCCs which are not overly exposed to tariffs or a cyclical recession, could bounce significantly, while more challenged credits could still have a long way down. These are the kinds of markets and cycle inflections that we can take advantage of, amidst a bit of short-term pain for potential alpha gains on the other side.
Municipal Bond Market Commentary
- Muni yields were higher and the US Treasury curve steepened with short rates falling and long rates going up for the week ending March 28. AAA muni yields were up 8, 13, 17, and 13 bp at 2, 5, 10 and 30 years while US Treasury yields were down 4 and 2 bps at 2 and 5 years, flat at 10 years, and up 4 bp 30 years.
- AAA Muni/Treasury ratios were up 3% at 2 and 5 years, up 4% at 10 years, and up 2% at 30 years to end the week at 69%, 73%, 76% and 93% at 2,5,10 and 30 years. AA Muni/AA Corporate ratios were up 1% at 2 years, 3% at 5 years, 4% at 10 years, and 1% at 30 years to end the week at 68%, 70%, 72% and 83% at 2, 5, 10 and 30 years.
- Municipal bond funds had outflows of $573 million for the weekly period ending March 26.
- Muni new issue volume is expected to be ~$10 billion this week.
Our take: As expected we saw upward pressure on AAA muni/UST ratios in the face of municipal fund flows that likely remain negative in the short term as investors pay their taxes. This, along with steady new issuance and a seasonal drop in reinvestment dollars all contribute to municipal relative underperformance. Nothing has changed regarding the primary driver of volatility in the municipal market being volatility in the benchmark US Treasury market due to fears of tariff driven stagflation.
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