Economic Commentary
- September nonfarm payrolls exceeded all estimates at +119k. Prior months were revised lower, with a net revision of -33k. The unemployment rate ticked up to 4.44%, rounded down to 4.4%, and up from 4.3% in August.
- Average hourly earnings remain under control at +0.2% month over month and +3.8% year over year.
- The October jobs report will not be published at all, and the November release will be delayed until December 16, after the December 10th FOMC meeting.
- Minutes from the October FOMC meeting underscored Jerome Powell’s remarks that there was nowhere near enough momentum or consensus for a rate cut in December. While the minutes reveal “several” participants — most likely Miran, Bowman, Waller — were ready to support a December cut at the October meeting, “many” said they are not likely to support a December rate cut without further evidence of a weaker job market.
Our take: There may not be enough compelling evidence available by the December 10th FOMC meeting to convince enough hawkish holdouts to go along with a rate cut. However, with ample additional information, including catch-up data, to be available by the January 28th meeting, if the labor market is continuing to stall-out if not trend lower, then a January cut could be a more likely outcome. This is reflected in implied probabilities of 39% for December, 56% in January, and a combined 95% probability of a cut between these two meetings.
Corporate Bond Market Commentary
- IG spreads were 1bp tighter last week at +83bp and total returns were -0.22%. That marked three straight weekly losses, the first such streak since last December.
- IG fund flows were +$2.1 billion.
- New issuance of $27.3 billion was well short of the $40 billion estimate, as market conditions worsened later in the week. DXC pulled a deal, the first market-related withdrawal of the year. Order books were 4.1x covered, attrition was 19%, NICs were 4.1bp, and deals tightened 26bp on average from IPT to final pricing.
- HY spreads were 8bp tighter and total returns were +0.07% (BBs +0.16%, Bs +0.12%, CCCs -0.59%).
- HY funds posted a -$367mm outflow for the week ended 11/12, the fifth straight weekly withdrawal totaling -$6.675 billion over that span.
- High yield new issuance was $7.55 billion, with deals from Commercial Metals, XPLR Infrastructure, Acushnet, Carpenter Technology, Applied Digital, and Graham Packaging.
Our take: As volatility picked up in both equity and credit markets, concerns around AI spending and private credit reared up again. Given the massive financing needs and our sense that these borrowers will not be price sensitive, net supply conditions in the IG market could worsen in 2026, which would otherwise push spreads wider and have knock-on effects in other credit markets, and equity markets as well. According to Jefferies research, over the last 20 years of data, every additional 1% of net issuance as a percentage of the overall IG market is worth 4 to 5 basis points of additional spread, so this AI-driven increase in IG net supply could push spreads 15-25bp wider next year, which would have a ripple effect across much of the credit markets overall.
Municipal Bond Market Commentary
- Municipal bonds posted a total return of +0.03% last week.
- Muni yields were -1, -0.8, -1 and -1 and ratios were -2, -1, -1, and -1 to 68%, 63%, 65%, and 85% at 1, 5, 10, and 30 years respectively.
- The new issue calendar this week is $10.8 billion, of which $10 billion is tax-exempt.
- Last week’s new issue volume was $10.2 billion.
- Fund flows were +$1.021 billion, with $1.1 billion into ETFs and -$79 million out of mutual funds.
- The New Hampshire Business Finance Authority approved the issuance of a $100 million bitcoin-backed municipal bond, which would be the first state issued bitcoin municipal bond.
Our take: Municipal bonds again held steady despite modestly higher rates and sizeable supply, continuing to demonstrate the value of the asset class in a portfolio. Reinvestment dollars and stable flows, coupled with a holiday supply hiatus next week, should position munis to have a solid finish to the year.
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