Economic Commentary
- The selloff in Japan, sparked by fears a proposed food tax cut would inflate the deficit, lead to global bond selling early Tuesday morning. The snap election is scheduled for February 8th, so rate volatility could continue until then.
- The Supreme Court heard oral arguments in Fed Governor Lisa Cook’s case, with media headlines suggesting the justices seemed skeptical of the Administration’s arguments. A decision in the case is likely still a long way off, but these headlines helped to temper near-term Fed independence concerns.
- Nest week’s Fed meeting might be relatively uneventful, as markets do not expect a rate cut. A bit of calm before the storm of potential new appointees arrive.
- Initial jobless claims & continuing claims remained moderate as the low hiring / low firing job market trend carries on.
- The PCE price index for November was +0.2%, and the core PCE price index was also +0.2%. The year-over-year figures were +2.8%.
- Personal income rose +0.3%, below the +0.4% estimate, and personal spending rose +0.5%, as consumers continue to spend beyond their means.
- On a CAPE multiple basis and with the 30-year real bond yield at 2.6%, the equity risk premium (ERP) is negative.
- The average 30-year mortgage rate fell from 6.18% to 6.16% last week, a new four-year low, and mortgage applications for refi and for purchase rose again.
Our take: Parsing all of the recent economic data and macro headlines, the themes that stand out are (1) a low hiring / low firing labor market with strong productivity, allowing labor costs to moderate and not stoke inflation, (2) strong economic growth and consumer spending, especially amongst higher-earners, (3) increasing mortgage activity but coupled with very slow construction activity, and (4) all kinds of geopolitical and macroeconomic headlines that should drive volatility but are not. Perhaps the best move is to ignore most of it and carry on.
Corporate Bond Market Commentary
- Investment grade bond spreads tightened -3bp to +75bp last week and total returns were -0.01%.
- IG new issuance was $59.2 billion across 21 issuers, largely driven by $48.8 billion from banks. NICs were only 0.5bp, book coverage was 4.6x, attrition was only 14%, and deals were tightened 28bp from initial price talk to final pricing. The average syndicate estimate for this week is $29.4 billion of IG issuance.
- IG fund flows were +$2.2 billion.
- High yield bond spreads tightened -9bp to +265bp last week and total returns were +0.15% (BBs +0.15%, Bs +0.23%, CCCs -0.11%).
- HY new issuance was only $2.65 billion.
- HY fund outflows were -$371.3 million.
Our take: Bond issuance was much slower than anticipated last week and began this holiday-shortened week slowly as well after the Japan / Greenland induced volatility. Some market participants are also suggesting that the reason for the slower pace may be that the pipeline was not as big as originally anticipated. Either way, lighter issuance is supporting the market, even amidst events that would typically induce more drawdowns.
Municipal Bond Market Commentary
- The municipal bond index returned +0.11% last week and is up +0.66% year-to-date.
- Yields were +7, -3, -3, and -1, and ratios were -3%, -2%, -1%, and unchanged at 64%, 58%, 61%, and 84% at 1, 5, 10, and 30 years respectively. Ratios at 1, 2, 5, and 10 years are at the richest levels of the last 90 days.
- Fund flows were +$2.273 billion with +$603 million into mutual funds and +$1.67 billion into ETFs.
- Last week’s new issue volume totaled $11.8 billion, of which $10.2 billion was tax exempt. This week’s new issue calendar totals $11.7 billion, of which $11.4 billion is tax-exempt.
- State and local government third quarter Big 4 tax collections (sales, property, personal income and corporate income) rose 4% year over year.
Our take: The muni market continued its strong start to the year last week, driven by ample cash balances from January principal and interest reinvestment and further bolstered by fund inflows. Municipal borrowers overall are generally healthy, as Big 4 tax revenues increased 4% in the most recent data from Q3 2025, which further supports the muni market.
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