Economic Commentary
- The covid-era pause on reporting delinquent federal student loans to credit agencies has now ended. As a result, staring in May 2025, 10% of US households may face a sharp decline in their credit scores, to levels that might preclude them from getting loans for cars, houses, furniture or other large expenditures. When added to tariffs and other uncertainty, this is another potential headwind for consumer spending over the coming months.
- The House passed the budget in a 215-214 vote. The bill would extend current tax rates, provide new tax relief in the form of no tax on tips, Social Security and overtime. There are offsets including spending cuts and repeal of green energy tax breaks. Other offsets won’t count in the CBO’s analysis because they were not initiated by the legislature, such as a reduction in federal employment and revenue from tariffs.
- Per FHN Financial, the deficit was 6.4% of GDP last year. CBO scoring based on May 18 committee mark ups was for a deficit of 6.8% at the end of ten years. Given changes needed to lure holdouts, it is likely to be a couple of tenths lower than that when the final bill is scored. With tariff revenue, which is not included in the CBO analysis, there’s a chance the projected ratio to GDP will fall under 5%.
- Fed Governor Chris Waller predicted second half Fed rate cuts if tariffs settle near 10%.
- Moody’s downgraded US sovereign debt to AA1 on concerns about the budget and “successive Presidents and Congress” unconcerned with the nation’s fiscal health.
- The components feeding into the PCE from the PPI were even better than their counterparts in the CPI. As a result, economists’ initial estimate for the April PCE deflator is for 0.1% increases headline and core on the heels of no increase in either in March.
- Housing starts, building permits, and existing home sales all came in weaker than expected, adding to the gloom around the housing market and likely weighing on all of the industries that rely on it.
- The University of Michigan consumer survey came in at 50.8, as both current conditions and future expectations were weak and below expectations. This is the second-lowest reading in the 75-year history of the survey. Both 1 year inflation expectations (7.3% – highest since 1981) and 5–10-year inflation expectations (+4.6% – highest since 1991) increased. It should be noted that the survey period for this data straddled the time period of the pause on tariffs, so future data sets will likely reveal revised expectations.
Our take: Interest rates have been marching steadily higher, partly on concerns about tariffs impacting inflation, but more recently due to concerns about the budget and its perceived lack of fiscal responsibility. A relatively weak 20-year UST auction did not help trading dynamics either. With 10-year rates having risen ~50bps since early April to above 4.5%, and 30-year rates up ~60bp to above 5%, we are likely closer to the high end of the trading range, and adding a bit of duration when few people seem to want it is likely a prudent move.
Corporate Bond Market Commentary
- IG spreads tightened 9bp to +93 and total returns were +0.19%.
- Fund flows were -$617 million, a deceleration from previous weeks but still the 10th straight week of outflows.
- IG new issuance was $31 billion across 32 issuers. Demand remained firm as order books were 4.4x, NICs were negative 1.0bp, attrition was only 18%, and deals tightened on average 30bp from initial price talk to final pricing.
- HY spreads tightened 37bps to +316bp and total returns were +0.83% (BBs +0.79%, Bs +0.80%, CCCs +1.16%). Year to date returns are +2.94% for BBs, +1.95% for Bs, and +1.28% for CCCs.
- Eleven borrowers issued more than $11 billion of new bonds, the busiest week since January.
- HY fund flows were a robust +$2.787 billion.
Our take: In high yield, a streak of inflows and subdued new issue supply at a time of general risk-on behavior pushed a nice period of total returns. Now that spreads have compressed much of the way back to mid-March levels, when new issue supply is rising, the near-term may be a bit more challenging, especially if fund flows aren’t as supportive. We are still a little while away from when companies might start warning on Q2 earnings, or the earnings reports themselves which won’t hit until mid to late July. This hasn’t stopped a string of credit potholes recently, and we fully expect them to continue to appear as uncertainty remains. We continue to be excited about the future opportunities for credit picking that are being created.
Municipal Bond Market Commentary
- Muni yields fell at all but 30 years and US Treasury yields rose across the curve for week ending May 16, 2025. AAA muni yields were down 2, 2, and 1 bps at 2, 5, and 10 years and up 2 bps at 30 years, and US Treasury yields were up 11, 9, 10, and 11 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios fell 2% across the curve to end the week at 72%, 73%, 74% and 90% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios fell 1% at 2, 5 and 10 years and remained flat at 30 years to end the week at 73%, 71%, 70%, and 83% at 2, 5, 10, and 30 years.
- Municipal bond funds had inflows of $769 million for the weekly period ending May 14.
- Another large new issue calendar is expected to bring $14.5 billion in deals this week.
Our take: New issue volumes remain high, but high nominal yields have brought steady inflows leading to continued relative outperformance by the muni market for the last several weeks. Fund flows and technical factors will be especially important in the relative performance of municipal bonds as we move toward early Summer, which has historically been a period of high issuance.
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