Economic Commentary
- Treasury released the monthly TIC data which showed foreign investors net bought $146 billion of long-term Treasuries in May, the most since August 2022. This purchase was driven by foreign private institutions, who net bought $119 billion long-term Treasuries in May, while foreign official investors purchased $26 billion. Overall, this data provides further evidence that concerns about de-dollarization following Liberation Day were overstated.
- The Atlanta Fed’s GDPNow model estimates 2.365% Q2 economic growth, with an uninspiring 1.5% annualized growth rate in consumer spending.
- The Philly and Richmond Fed economic activity indices improved sequentially, though both are still negative, indicating ongoing weakness. The Richmond manufacturing index weakened from -8 to -20.
- June housing starts increased more than expected to 1.321 million, up from a revised 1.263 million last month. Building permits were also slightly above expectations at 1.397 million.
- University of Michigan sentiment increased from 60.7 to 61.8, current conditions from 64.8 to 66.8, expectations from 58.1 to 58.6. 1-year inflation expectations declined from 5.0% to 4.4% and 5-10 years from 4.0% to 3.6%. Recall that the 1-year expectation reached as high as 7.3% back in May.
- The index of leading indicators declined -0.3% following a revised 0% reading last month.
- Initial jobless claims were only 217k, down from 221k last week and below the 226k estimate. Continuing claims increased slightly from 1.951 million last week to 1.955 million this week.
- US PMIs were mixed, as manufacturing PMI decreased from 52.9 to 49.5, while services PMI increased from 52.9 to 55.2. The composite PMI increased from 52.9 to 54.6, above the 52.8 estimate.
Our take: A light week of economic data and activity is perhaps a calm before the next storm, as the coming week brings more substantive data releases and an important FOMC meeting. While the Fed is unlikely to cut rates at this meeting, much focus will be on whether September is teed up as a likely next cut. There has been a bit more clarity emerging on trade, with the Japan deal perhaps setting some guidelines. If an EU deal can soon follow, that may be enough to put some guardrails in place that the Fed can live with by September.
Corporate Bond Market Commentary
- IG spreads tightened 3bp to +80bp and total returns were +0.18%.
- IG fund flows were +$3.8 billion.
- New issue IG supply was only $16.7 billion and well-below estimates of $35-$40 billion.
- HY spreads tightened 4bp to +294bp and total returns were +0.17% (BBs +0.15%, Bs +0.21%, CCCs +0.13%).
- Fund flows into HY were +$700 million.
- New issue HY supply was $8.5 billion
- Foreign investors were net buyers of $33 billion of corporate bonds in May, marking 3 straight months of solid inflows totaling $130 billion, the fastest pace since February 2024.
Our take: Higher quality bonds have tightened to levels that leave little room for further spread tightening, so future returns would depend on lower UST rates plus coupon income. With fund flows stable and conducive, this is pushing cash into lower quality bonds, and that cohort is compressing. This trend is bringing more low-quality issuers into the primary market to opportunistically refinance 2027 & 2028 maturities. As long as the music keeps playing, people will keep dancing. We are participating in the robust new-issue market on a methodical but selective basis, which is just one of the tools in our kit to enhance returns. We also expect as high yield borrowers start to report their earnings over the coming weeks, there will be some surprises both good and bad, and look forward to using our agility to react to any outsized price moves or dislocations to step into bonds at attractive prices and create future returns.
Municipal Bond Market Commentary
- The muni index returned -0.86% last week, the worst weekly return since early April.
- Fund outflows were -$338 million, ending a streak of 11 straight weeks of inflows.
- Ratios ended the week at 60.3%, 63.9%, 65.5%, 75.3%, and 95.0% at 1, 2, 5, 10, and 30 years.
- New issue volume was $17 billion, a five-week high.
- This week’s expected new issue calendar totals $12.9 billion.
- Muni tobacco bonds declined last week after the FDA authorized the marketing of tobacco and menthol flavored JUUL e-cigarettes. The HY muni tobacco sector index was down -1.60%.
Our take: The muni market had a predictable reaction to elevated new issue supply, with prices reacting accordingly. Some of these deals at the long end priced at or above 5%, which is an important psychological barrier which could start to entice buyers into the market. Bond buyer 30-day visible net supply has come down off the recent highs, offering another data point that should support valuations.
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