Economic Commentary
- The preliminary May S&P Global US manufacturing index unexpectedly rose from 50.2 to 52.3, while the services index rose from 50.6 to 52.1, suggesting the economy gained momentum mid-quarter. “At least some of the upturn in May can be linked to companies and their customers seeking to front-run further possible tariff-related issues, most notably the potential for future tariff hikes after the 90-day pause lapses in July,” S&P Global Chief Business Economist Chris Williamson explained.
- U.S. home prices fell 0.3% in March from February, the first monthly decline on a seasonally adjusted basis since January 2023, according to the S&P CoreLogic Case-Shiller National Home Price Index. The reading suggests high mortgage rates and economic uncertainty among buyers are hurting demand during the crucial spring selling season.
- The US court of international trade declared President Trump’s tariff policies unconstitutional. The administration will appeal the decision, and if unsuccessful, there appears to be other means to implement tariffs, including Section 122 and Section 301.
- Nondefense capital goods orders for ex-aircraft fell 1.3% in April, a much bigger than expected decline. The drop reflected an unusual weakness in auto orders, likely related to the end of the first quarter. Q1 auto orders were bolstered by efforts to front-run tariffs, so some weakness after that pulled-forward demand is understandable.
- Conference Board consumer confidence jumped unexpectedly in May. The present situation index rose 4.8 points from 131.1 to 135.9, while expectations increased 17.2 points from 55.4 to 72.8. While the increase was the biggest since 2021, confidence rose from near pandemic-era lows to 98.0, a level at the low end of the 2022-24 range.
- Revised Q1 GDP was -0.2%. Personal consumption was 1.2%, below expectations of 1.7%. The Core PCE price index of 3.4% was also lighter than expected at 3.5%.
Our take: We have been waiting to see whether soft economic data would portend resilient Q1 hard data rolling over after pulled-forward demand from front-running tariffs played-out, or if weak soft data points would rebound and catch back up to hard data as some of the tariff-related uncertainty calmed down. It is too early for a definitive answer, but some of the soft data is starting to improve off of April lows. This could merely be tracking the significant recovery in stocks and other asset prices. In the meantime, the Fed is in no hurry to do anything, as corroborated by meeting minutes released this week and various FOMC speakers as well.
Corporate Bond Market Commentary
- IG spreads were unchanged at +93bp and total returns were -0.43%.
- Fund flows were +$1.244 billion, the first positive inflow in 9 weeks.
- New-issue supply was $35.9 billion across 19 issuers. Order books averaged 4.0x, NICs were 1.2bp (down from the May average of 2.0bp and YTD average of 3.8bp), attrition was only 17% and deals tightened by 27bp on average, all signs of healthy demand.
- HY spreads were 24bp wider to +340bp and total returns were -0.45% (BBs -0.40%, Bs -0.55%, CCCs -0.41%).
- Fund flows were +$804 million.
- HY new issue supply was $9.9 billion, another relatively large week of issuance.
Our take: Corporate bond markets took a breather last week after a strong run of recent performance. Given the recovery in credit spreads, future returns will need to come from some combination of lower rates, more grinding tighter in spreads due to favorable supply/demand technicals, and idiosyncratic performance. Lower rates are possible, but hard to predict. Technicals are usually a bit challenged after Memorial Day. Fortunately, idiosyncratic performance is our bailiwick, and we are both confident and excited about the opportunity set being created daily due to volatility and uncertainty.
Municipal Bond Market Commentary
- The municipal and US Treasury bond curves both steepened over the week ending May 23, 2025. AAA muni yields were -2, -2, +6, and +11 bps at 2, 5, 10 and 30 years and US Treasury yields were -1, -1, +3, and +9 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were unchanged at 2 and 5 years and up 1% at 10 and 30 years to end the week at 72%, 73%, 75% and 91% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios fell 2% at 2 and 5 years, were unchanged at 10 years and rose 1% at 30 years to end the week at 71%, 69%, 70%, and 84% at 2, 5, 10, and 30 years.
- Municipal bond funds had inflows of $768 million for the weekly period ending May 21.
- Another large new issue calendar is expected to bring $13 billion in deals this week.
Our take: The municipal market is holding strong in the face of recent heavy supply, as high nominal yields have supported steady inflows for the last several weeks. We’ll be keeping an eye on fund flows as technical factors will be especially important in early Summer, which has historically been a period of high issuance. Fund flows will likely determine relative performance of municipal bonds, while all financial markets continue to be subject to headline risk driven volatility.
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