Economic Commentary
- The US economy added 147k new jobs in June, ahead of the 106k expectation. However, private payrolls only added 74k, below the 100k consensus. Half of the 147k growth in payrolls was in government jobs, specifically state and local education. Such a big increase in June for public education may be a seasonal adjustment issue, and private sector employment is a better indicator of underlying labor market strength. The 74k gain in private sector payrolls was the lowest increase since last October, when hiring was crimped by hurricanes and strikes.
- The lower unemployment rate mostly stemmed from a fall in labor force participation, largely a result of falling foreign-born participation. The labor force has declined 855k over the last two months as the Administration’s immigration policies start to hit. Average hourly earnings were below expectations at +0.2% month over month and 3.7% year over year, pushing the 3-month average down to just 3.2%.
- FOMC minutes added some color to the diverging approaches within the FOMC but were generally unsurprising. Most FOMC participants believe there will be rate cuts by the end of the year, that tariff-induced inflation pressures “may be temporary or modest,” and that risks to inflation and the labor market “had diminished but remain elevated.” The minutes also clarify that, at least as of the June 17-18 meeting, only Governors Miki Bowman and Chris Waller were open to rate cuts at the July meeting.
- President Trump announced 50% tariffs on copper imports, causing a spike in prices for copper traded in New York and a steep decline in prices on the London exchange. No details have been offered yet about timing or any potential exemptions. Importantly, the US does not currently have the capabilities to be self-sufficient in copper production.
- The NFIB’s small business optimism index slipped two tenths in June to 98.6 after rising from 95.8 to 98.8 in May. While the index has risen significantly from 2023-24 lows, when it was consistently under 92, only about a quarter of small businesses are optimistic about rising profitability. An increasing number are struggling to fill open positions and only a minority expect to increase capital spending this year. The index topped 104 last December, before tariff plans were unveiled. the NFIB’s “average change in employment per firm” component fell to -0.21, the lowest since August 2023.
Our take: In the absence of first-tier economic data or material updates to the Fed’s perspective this week, tariffs continued to dominate headlines, impacting currency (and now commodity) markets with little noticeable effect on Treasuries. This feels like another example of the extreme complacency in the markets right now. For the FOMC, the further delays to August 1st for the implementation of tariffs may postpone the Fed’s ability to gauge the magnitude of pass-through to consumer prices, and a potential 50% levy on copper, a base industrial metal, may only add to those uncertainties. Now the bond market is not fully pricing in a rate cut until the October 29 decision. USTs have been surprisingly calm and rangebound lately, surviving 10 and 30-year auctions this week as well. We don’t expect this tranquility to last too long, and have CPI and other data coming on 7/15 circled on the calendar as a possible catalyst.
Corporate Bond Market Commentary
- IG spreads tightened 8bp to +80bp and total returns were +0.26%.
- Fund flows were +$1.152 billion.
- New issuance was only $8.1 billion in the holiday shortened week. Demand remained firm with order books 4.1x oversubscribed, NICs were 2.0bp, attrition was 20%, and final pricing tightened 26bp from initial talk.
- HY spreads tightened 22bp to +280bp and total returns were +0.45% (BBs +0.28%, Bs +0.58%, CCCs +0.85%).
- Fund flows were $870 million.
- HY new issuance was $6.550 billion led by $4 billion from Venture Global Plaquemines as well as Vail Resorts, Hilton, Ambath, Arbor Realty and Phoenix Aviation.
Our take: Another solid week of returns for both IG and HY last week leaves both markets at spread levels that are approaching multi year tights. Future performance for IG and BBs, which are rate-sensitive, would need to come from some combination of lower UST rates and coupon income, without giving back returns from spread widening. HY returns have the benefit of higher coupon income, and pockets of compression in Bs and CCCs. We are approaching the start of Q2 earnings season, which also coincides with lower market liquidity in the peak of summer doldrums. Complacency is pervasive and various fear and greed indices are flashing extreme greed. This warrants caution, which we are approaching with hedges and a cash balance ready to deploy into either single-name or broader market dislocations.
Municipal Bond Market Commentary
- Municipal bond yields fell everywhere except the long end while US Treasury yield rates moved higher across the curve in the holiday shortened week ending July 3, 2025. AAA muni yields were -4, -5, -1, and +3 bps at 2, 5, 10 and 30 years and US Treasury yields were +13, +11, +7 and +3 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios moved lower, -4% at 2 years, -3% at 5 years, -1% at 10 years and unchanged at 30 years to end the week at 66%, 68%, 74% and 94% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios were -3% at 2 years, -2% at 5 years, -1% at 10 years and unchanged 30 years to end the week at 64%, 66%, 72%, and 88% at 2, 5, 10, and 30 years.
- Municipal bond funds had inflows of $959 million for the weekly period ending July 2.
- The new issue calendar is expected to bring $14.1 billion of issuance this week.
Our take:The muni market rebounded from the prior week’s underperformance to outperform Treasuries for the week ending July 3. Inflows remained positive for the 6th consecutive week, which combined with seasonally high reinvestment dollars from called and matured bonds provided strong support for municipal bonds. As new issuance for the month to date is still well below July reinvestment totals, we anticipate continued solid muni performance in the near term.
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