Economic Commentary
- The government shutdown is on track to end as the House vote follows the Senate vote earlier in the week. If past practice is followed, we should soon get the schedule of when some or all of the economic data that was not released during the shutdown will be released over the coming days and weeks.
- ZipRecruiter announced that retailers are advertising 8.4% fewer job postings than last year, and temporary positions in leisure/hospitality are down 12%.
- U.S. consumer credit was weak in September, managing just a +0.3% increase after a flattish August. The year-over-year trend has been pared to nearly 0% from over +2.0% a year ago, and a near +4.0% trend two years back.
- The NFIB small-business optimism index dropped to a 6-month low of 98.2, down from 98.8, primarily on reduced earnings. Hiring plans, prices paid and expected prices received all moved lower.
- ADP released its NER-Pulse data showing that in the four weeks ending October 25, payrolls fell by 11,200.
- The University of Michigan consumer sentiment index declined again, to 50.3 down from 53.6 last month. Current conditions were hit hardest, suggesting some of the dour mood could be attributable to the government shutdown and the associated problems for many people.
Our take: The end of the government shutdown should remove some of the downside risks to the economy and restart the flow of economic data. However, some of the data may be skipped or less reliable, so while it will at least begin to lift some of the fog that Fed governors cited as reasons to consider a pause at their December meeting, it may introduce volatility as well.
Corporate Bond Market Commentary
- IG spreads widened 4bp to +84bp, the widest level since June, and total returns were -0.16%.
- IG new issue supply was $55 billion across 31 issuers, including $17.5 billion from Alphabet. NICs were 7.1bp, skewed higher by the Alphabet deal. Books were 3.3x covered, attrition was 31% and deals tightened 27bp on average.
- IG fund flows were +$3.1 billion.
- HY spreads widened 21bp to +315bp and total returns were -0.33% (BBs -0.31%, Bs -0.31%, CCCs -0.56%).
- HY new issue supply was $9 billion including deals from Allison Transmission, Garda, Nabors, Wayfair, Tenet Healthcare, and Cipher Compute.
- HY outflows were -$955 million and loan fund outflows were -$137 million.
Our take: Some of the concerns around massive AI-related capex plans is also creeping into bond markets. Much of these budgets will need to continue to be funded with debt, and is contributing to worsening broader supply/demand technicals. These large borrowings in both the IG and HY markets, combined with a burgeoning M&A cycle, may erode some of the technical support for these markets where supply / demand has been in balance. If supply increases significantly, it could push spreads wider and/or crowd-out other opportunistic issuers.
Municipal Bond Market Commentary
- The municipal bond index returned +0.04% last week.
- Muni yields were +1, +4, -3, and -1 and ratios were +1%, +1%, unchanged and -1% to 70%, 65%, 66%, and 86% at 1, 5, 10, and 30 years respectively.
- Fund flows were +$1.679 billion, including $811 million into mutual funds and $868 million into ETFs.
- Last week’s new issue volume was $15.8 billion, of which $14 billion was tax-exempt.
- This week’s calendar totals only $7 billion, of which $5.4 billion is tax-exempt.
Our take: Municipal bonds performance was steady last week while corporate and US Treasury bond markets did not fare as well, highlighting the benefits of municipal bonds as part of a portfolio. This resiliency was in spite of an elevated $15.8 billion primary calendar, as fund inflows and reinvestment dollars provided technical support. Going forward, new issue supply should moderate while the second half of November and December reinvestment dollars continue to be favorable, giving a solid outlook for munis into year end.
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