Economic Commentary
- The Supreme Court ruled 6-3 that the IEEPA tariffs were invalid. The administration is pivoting to Section 122 and other tariffs, but these measures either have 150 days or require an investigation period before imposition.
- Some economists believe that the average effective tariff rate, which was 16% prior to the ruling, may drop to 9% by the end of the summer. That alone should shave at least -30 basis points from the inflation rate.
- This should also reduce uncertainty in the outlook because large surprise announcements of tariffs are less likely, and scenarios where the SCOTUS forces the reversal of the tariff policy are less likely.
- Core PCE prices rose 2.9% year over year, a tenth higher than expected. PCE super core rose +0.34% in December and 3.3% year over year.
- Durable goods orders declined -1.4%, but excluding transportation rose +1.0%.
- Initial jobless claims were 212k, slightly below estimates of 216k. Continuing claims were 1833k, also below expectations of 1858k.
Our take: There has not been a lot of important economic data this week, but there have been plenty of Fed speakers. The general theme of these speeches seems to be patience to make sure inflation comes down, and uncertainty as to how to evaluate the potential impacts of AI on the labor markets. Meanwhile, US Treasury bonds have benefitted from the recent risk off behavior with a mild flight-to-quality bid.
Corporate Bond Market Commentary
- Investment grade bond spreads tightened 1bp to +78bp and total returns were unchanged.
- IG new issue supply was $27.2 billion in the holiday shortened week, in line with expectations. New issue concessions were 2.6bp, books were 4.1x covered, attrition was 23%, and deals were tightened 27bp on average from IPT to final pricing. The current week has already surpassed $63 billion, well ahead of the $53 billion expectation.
- IG fund flows were +$3.8 billion.
- High yield spreads tightened 9bp to +286bp and total returns were +0.19% (BBs +0.20%, Bs +0.18%, CCCs +0.15%).
- HY new issuance was $5.1 billion with deals from Michaels, Genesis Energy, CNX Resources, and Cooper-Standard Automotive.
- HY fund flows were -$152 million and leveraged loan funds +$22 million.
- Blue Owl sold $1.4 billion of private loans from three of its BDC funds at 99.7% of par value (to institutional investors using new vehicles to be managed by Blue Owl), and simultaneously announced that OBDCII would permanently halt quarterly fund redemptions.
Our take: Credit markets are being impacted by the same concerns shaking equities – whether the massive AI spending will yield appropriate returns, and more recently how the rapid deployment and improvement of AI models may disrupt existing industries and companies. The benefit of active unconstrained management is the potential ability to avoid or underweight possible problem areas and then step in and buy them after they get beaten up.
Municipal Bond Market Commentary
- The municipal bond index generated a +0.19% return last week.
- Muni yields were -1, -1, -2, and -4, and ratios were -2%, -1%, -1%, and -1% to 58%, 57%, 61%, and 86% at 1, 5, 10, and 30 years, respectively.
- Fund flows were $638 million, including $586 million into mutual funds and $52 million into ETFs, the lightest week since mid-January.
- Last week’s new issue supply was $9.2 billion, of which only $7.6 billion was tax-exempt. This week’s new issue calendar is $10.4 billion, of which $9.6 billion is tax exempt.
Our take: Municipal bonds continued a slow steady grind last week, despite lighter fund inflows and a decent sized new issue calendar. We will soon be entering a slower seasonal period for supply & demand technicals, as principal and reinvestment dollars are lighter and fund flows typically moderate as muni investors take liquidity to pay taxes. 30-day visible supply is below the same period in 2025 and is not flashing warning signs as of now. The long end of the muni curve continues to offer better relative value than the short and intermediate portions of the curve.
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