Economic Commentary
- April CPI rose 0.2% headline and core. Both were expected to rise 0.3%. Year-on-year, the CPI slowed from 2.4% to 2.3%, while the core was unchanged from March at 2.8%.
- There were tariff-related price increases in the CPI in categories including furniture and electronics, but they were not big enough to overcome price relief in other categories.
- Real hourly earnings rose only 1.4% year over year, continuing to ride a level that is consistent with manageable inflation.
- Small business optimism fell in April from 97.4 to 95.8, which was better than expected, but not very good nonetheless.
- In April, the PPI fell 0.5%, well below the consensus 0.2% rise, and the core PPI, which excludes food, energy, and trade services, fell 0.1%. It was expected to rise 0.3%. The PPI fell in large part due to the biggest decline, -0.7%, in margins in final demand services since the start of the series in 2009.
- Retail sales rose 0.1%, which does not sound like much, but beat expectations of 0.0% and — more importantly — consolidates the 1.7% March increase (revised from 1.4%). Excluding autos, gas and food, retail sales rose 0.2%, a tenth less than expected, but March sales of these goods were revised three-tenths higher, so this also counts as a beat. Control group sales fell 0.2%, however, which is five-tenths less than expected and the revision there, while also upward, was only a tenth.
Our take: There are two ways to think about the latest CPI and PPI reports. One line of thinking is that the worst is yet to come. The other is that companies cannot raise prices without losing too many sales due to elasticity, especially for lower- and middle-income households. If people have limited means, price pressure in some areas can therefore lead to price relief in others. There were ample examples of that when inflation failed to rise after 2019 tariffs. Given that expectations as conveyed by the University of Michigan consumer sentiment survey are that consumers are braced for 6.5% inflation, if the actual outcome is lower this could unleash a bit of a wave of renewed consumer confidence and higher spending ahead. At the same time, the tax and budget bill working its way through Congress will also have a huge impact on the bond market’s views of deficits and therefore the term premium and interest rates, especially at the longer end of the curve. With rates having risen back to levels of ~4.5% on the 10-year and ~5% on the 30-year, stepping back into some duration here at the higher end of this trading range makes sense.
Corporate Bond Market Commentary
- IG spreads tightened 4bp to +102bp and total returns were -0.04%.
- Fund flows were +$1.244 billion.
- New issuance was $45 billion across 31 issuers. Deals were more than 4x oversubscribed for the third consecutive week at 4.3x. However, issuers with tariff exposure only drew 1.9x book coverage and paid higher concessions of up to 25bp, such as Apple, as an example. On average NICs were 5bp, attrition rose to 23% driven by Comcast and GM whose deals saw over 60% of orders withdrawn.
- HY spreads tightened 7bp to +353bp and total returns were a modest +0.17% (BBs +0.15%, Bs +0.09%, CCCs +0.69%).
- Fund flows were +$804 million.
- New issuance was $5.9 billion across 5 deals.
Our take: High yield has staged a nice recovery and is back to somewhat uninspiring levels of spread ON AVERAGE. However, single-name dispersion is increasing, which is critically important in creating attractive opportunities for credit pickers such as us. This looks to be the beginning of a fertile wave of future opportunity. Investment grade bonds have lagged given the persistent move higher in rates lately. Even though spreads have retraced much of the recent weakness, there is a trading total return opportunity as rates grind lower from the top of this trading range.
Municipal Bond Market Commentary
- Continuing the trend of the prior week, muni yields fell and US Treasury yields rose across the curve for week ending May 9, 2025. AAA muni yields were down 1, 1, 1, and 0 bps at 2, 5, 10 and 30 years and US Treasury yields were up 7, 8, 7, and 5 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios fell 2% at 2 and 5 years, 1% at 10 years, and were flat at 30 years to end the week at 74%, 75%, 76% and 92% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios fell 2% at 2 years, 1% at 5 and 10 years, and were flat at 30 years to end the week at 74%, 72%, 71%, and 83% at 2, 5, 10, and 30 years.
- Municipal bond funds had inflows of $1.06 billion for the weekly period ending May 7.
- Another large new issue calendar is expected to bring $15 billion in deals this week.
Our take: New issue volumes have been large, but high nominal yields have brought steady inflows leading to relative outperformance by the muni market in recent weeks. Though it will inevitably come up again within a few years, it appears that the municipal bond tax exemption will be spared in the proposed tax and budget legislation.
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