Economic Commentary
- Minutes from the January FOMC meeting were largely as expected, except for new language that ‘several participants indicated they would have supported a two-sided description of the Committee’s future interest rate decisions, reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels’. This does not mean they actually expect to hike rates; instead, they believe that a more hawkish posture can keep inflation expectations well-anchored.
- The Supreme Court is scheduled to release more opinions on Friday, which could mean the decision on tariffs is revealed.
- The Atlanta Fed GDPNow estimate is currently 3%, down from readings earlier in the quarter of over 5%.
- CPI fell below 2.5% in January for the first time since tariffs lifted it from 2.2% last spring. CPI rose 0.17% headline and 0.29% core, resulting in year-on-year inflation of 2.39% and 2.51%, respectively. Core goods inflation continues to improve after tariff pass-through peaked in the middle of last year, core services inflation is stable even when accounting for shutdown-induced shelter price distortions, and big swings in CPI components that don’t feed directly into the Fed’s preferred PCE deflator offset each other.
- WalMart, a bellwether for broad swaths of consumers, cited several indicators showing warning signs, including a rise in US consumer debt and delinquencies, a hiring recession, and overall pressures on consumers in offering a cautious forecast for 2026.
Our take: CPI data offers the possibility of a favorable outlook on inflation but will need to be corroborated by PCE tomorrow and further data over the coming months. Markets appear to be in tune with the Fed that patience is required to confirm the trend, given that the labor market is not rolling over hard enough to justify rate cuts in and of itself.
Corporate Bond Market Commentary
- Investment grade bond spreads widened 3bp to +79bp, but lower UST rates drove IG total returns +0.79%.
- Fund flows into IG were +$4.3 billion.
- IG new issuance was $40.1 billion, in line with expectations, including a $20 billion deal from Alphabet (Google). Book coverage was 4.5x, NICs were slightly higher at 5.3bp, attrition was 23%, and deals tightened on average 29bp from IPT to final pricing.
- High yield bond spreads widened 8bp to +295bp and total returns were +0.11% (BBs +0.23%, Bs -0.05%, CCCs -0.06%. Year to date returns are BBs +0.93%, Bs +0.55%, and CCCs +0.14%).
- HY fund outflows were -$84 million and leveraged loan fund flows were +$22 million.
- HY new issuance was $11 billion including deals from Performance Food Group, Transdigm, Block Communications, TKC Holdings, Advanced Drainage Systems, Tract Capital, and First Quantum Minerals.
Our take: High yield bonds are facing muted fund flows and a modestly increasing cadence of new issuance. So far, the HY market has not followed equities lower on selloff days, but technicals feel a bit tenuous and susceptible to at least a modest pullback. The large composition of BB bonds, which are more rate-sensitive and being propped up by lower US Treasury rates, and the decline in the duration of the HY index overall to 2.74 have cushioned the blow so far.
Municipal Bond Market Commentary
- The municipal bond index returned +0.33% last week and is now up 1.45% year-to-date.
- Muni yields were -8bp, -6bp, -6bp and -2bp and ratios were -2%, +1%, +1% and +2% to 60%, 58%, 62%, and 88% at 1, 5, 10, and 30 years respectively.
- Fund flows were +$1.523 billion split between $705 million into mutual funds and $818 million into ETFs.
- This week’s new issue calendar is $8.4 billion, of which $7.9 billion is tax-exempt. Last week’s calendar was $15 billion.
Our take: The elevated new issue calendar last week was digested relatively smoothly, aided by February 15th principal and interest reinvestment dollars and continued positive fund flows. Long-end ratios have drifted slightly higher and appear to offer better relative value than other parts of the muni curve.
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