Economic Commentary
- Existing home sales fell from an annualized rate of 4.04 million in May to 3.93 million in June, close to the lowest print in the pandemic era.
- The Treasury refunding announcement stated that they will keep auction sizes of longer-dated US Treasury notes and bonds unchanged for the foreseeable future, with the required additional supply being met by additional T-bill issuance and was widely expected.
- Real GDP grew at a 3.0% rate in the second quarter after falling 0.5% in Q1. Domestic demand growth was little changed between Q1 and Q2. Real domestic final sales grew at a disappointing 1.1% rate following the disappointing 1.5% rate in the first quarter. The first half average real GDP growth rate — a better way of thinking about the data given the volatility in trade and inventories caused by tariff policies — was 1.25%. Domestic demand is the weakness Governors Waller and Bowman cited in their call for a rate cut at today’s meeting.
- The GDP price index rose at a 2.0% rate in Q2, the least since a 1.9% increase in last year’s third quarter. The PCE deflator rose at a 2.1% rate, down from 3.7% in Q1 and a 2.5% rate in the second quarter of last year.
- ADP reported 104k private sector jobs created, above the 76k estimate. The prior month was revised up from -33k to -23k.
Our take: Headline GDP appears solid, but this does not reflect the underlying trend in the economy when all of the tariff-induced volatility in imports and exports is factored in. We are still in the early days in terms of understanding the impacts on businesses and consumers from this tariff policy. Lower-end consumers have been strapped for a while; understanding if this weakness is creeping up into middle- or higher-income cohorts will help anticipate future consumer spending, a key driver of overall economic activity.
Corporate Bond Market Commentary
- IG spreads tightened 2bp to +78bp and total returns were +0.52%.
- IG fund flows were +$1.8 billion.
- IG new issue supply was $22.7 billion across 14 deals. Books were 4.7x covered, new issue concessions were 1.7 bp, the average tightening from IPT to final pricing was 26bp, and attrition was only 17%. This week’s calendar looks to be only $10 – $15 billion. Supply for July is tracking well below the original $100 billion estimate.
- HY spreads tightened 9bp to +284bp and total returns were +0.35% (BBs +0.32%, Bs +0.35%, CCCs +0.49%).
- HY fund flows were $912 million.
- New issue HY supply was $9 billion.
Our take: Valuations on a spread basis continue to be expensive, but trading technicals have been supported by fund inflows and adequate cash balances. As we have been writing, forward returns would come from lower UST rates, coupon income, and further compression of lower rated/higher yielding bonds. We also expect to be able to take advantage of the active new issue calendar and some single-name volatility from those issuers who disappoint investors with earnings or forward guidance. As we enter the August market doldrums, such volatility could be exacerbated. We are maintaining portfolio-level hedges and a healthy cash balance to deploy towards both opportunities.
Municipal Bond Market Commentary
- Municipal bond returns were +0.25%.
- Ratios ended the week at 59%, 64%, 75%, and 96% at 1, 5, 10 and 30 years.
- Fund flows were +$572 million.
- New issuance was $15 billion. This week’s calendar totals $11.5 billion.
Our take: Municipal bonds recovered a bit last week after a few weeks of weakness driven by higher interest rates, fund outflows, and an elevated new issue supply. These technical trading factors should improve as August 1st principal and interest reinvestment dollars are available to bolster fund flows, which have stabilized. The expected totals for August are $43 billion of principal and $14 billion of interest. At the same time, the new issue supply is moderately lower, and ratios have reached levels which typically attract crossover or total return buyers, especially at the longer end of the yield curve.
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