Economic Commentary
- WTI oil is trading close to $75 and Brent near $77 a barrel today as traders speculate on whether the U.S. will join Israel in attacking Iran’s nuclear facilities.
- The options market has priced in an immediate acceleration in easing right after Powell’s exit from the Fed next February. However, given that the dot plots reveal the views of all 19 FOMC participants and 12 of them vote, merely replacing Jerome Powell as chair may not change the direction of interest rate policy.
- May retail sales declined -0.9%, below the -0.6% estimate, while sales excluding autos and gasoline declined -0.1%, and control group sales were up +0.4%.
- The updated Atlanta Fed GDPNow tracking model predicts 3.4% for Q2. While 3.4% would be strong under normal circumstances, when viewed in conjunction with the Q1 drop of -0.2%, the average first half growth rate is tracking towards 1.5%, which is consistent with the slowdown evident in the employment report and in ISM survey data.
- May housing starts of 1.256 million were the lowest level since May 2020 and well below expectations of 1.35 million. Higher rates and lower buyer confidence are chilling the all-important spring selling season.
- The FOMC left interest rates unchanged, as widely expected. The updated Summary of Economic Projections (dot plots) still shows a median of 2 rate cuts this year, but now 7 members see zero cuts this year, up from 4 as of the previous iteration. Other adjustments to the dot plots show slightly slower growth, modestly higher inflation, and an unchanged long-term fed funds rate of 3%.
Our take: If today’s FOMC decision were based on the current data, the Fed would have cut given core PCE inflation is at a four-year low of 2.5% and the economy is growing more than a percentage point slower than last year. However, Chairman Powell reiterated the message that there is tremendous uncertainty around their forecasts, and they expect goods inflation to pick up over the coming months as tariffed goods work their way through the supply chain. Because the economy is in a decent place and the labor market is not deteriorating rapidly, the Fed believes there is no harm in waiting until more clarity emerges to make any significant policy changes.
Corporate Bond Market Commentary
- IG spreads widened 1bp to +88bp and total returns were +0.65%.
- IG fund flows were a four-week low of +$2.7 billion.
- IG new-issue supply was $20.5 billion across 19 issuers, below estimates of $25 billion. New issue concessions were 3bp, order books were 4.8x subscribed, deals tightened 26bp on average from initial talk to final pricing, and attrition rates were low at 14%. The current week should also see muted issuance given the FOMC meeting and the market holiday on Thursday.
- HY fund flows were +$1.3 billion.
- HY spreads were 9bp wider to +318bp and total returns were +0.15% (BBs +0.20%, Bs +0.19%, CCCs -0.20%).
- HY new-issue supply was $2.55 billion, the lightest week since early April.
Our take: After posting strong returns in the second half of April and into May, high yield bonds have been rangebound in a narrow band for the last few weeks. Fund flows have been supportive, but new issuance increased to soak up much of those fund flows. From here the path forward is more challenging, both fundamentally and technically, as we head into the summer doldrums. Spreads are back to relatively tight levels, but all in yields are enticing. We have the potential expiry of the tariff pause just as we also are about to head into Q2 earnings season. In Q1, management teams passed on giving guidance or granular commentary on tariff impacts and their lack of visibility on consumer demand. Investors may be less patient this time around, as companies have now had another three months to study the issues and assess their options for adjusting supply chains, mitigating tariff impacts, and experimenting with price elasticity. For most companies, whatever inventory they may have accumulated before tariffs were implemented has likely been largely depleted, and now they face the prospect of higher costs and have the options to raise prices, cut costs, or just lose margin and be less profitable. How management teams navigate this dilemma will reveal which products truly have a competitive advantage and price inelasticity versus those that do not, and this revelation should create dispersion amongst bond prices, which we will be keen to take advantage of.
Municipal Bond Market Commentary
- The Muni and US Treasury yield curves both moved lower during the week ending June 13, 2025. AAA muni yields were -4, -4, -3, and -3 bps at 2, 5, 10 and 30 years and US Treasury yields were -9, -12, -11, and -7 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were unchanged at 2 years and 1% higher at 5, 10 and 30 years to end the week at 68%, 70%, 75% and 93% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios fell 2% at 2 years, 1% at 5 years, and were unchanged at 10 years and 30 years to end the week at 66%, 66%, 71%, and 87% at 2, 5, 10, and 30 years.
- Municipal bond funds had inflows of $523 million for the weekly period ending June 11.
- The new issue calendar is smaller than in recent weeks, with $6.5 billion in deals predicted for this week.
Our take: AAA muni/UST ratios moved slightly higher but the muni market has performed well despite the high issuance volume. Inflows have been consistently positive recently, which should support strong relative performance given a smaller issuance calendar and negative net supply in the pipeline.
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