Economic Commentary
- The FOMC minutes from the June 16-17 meeting were hawkish but not significantly so. All participants supported keeping rates unchanged, while a few said there was a case for raising the funds rate. Staff inflation forecasts were revised to show that inflation does not get down to 2% until the end of 2028, versus the end of 2027 in the April minutes.
- The ISM Services index slowed a bit to 54.0. The employment component of the index was positive for only the second time this year.
- Fed Governor Chris Waller explained why the Fed dropped its forward guidance, saying it can hurt policy transmission if too strong, and it is problematic when relatively high probability scenarios require different policy paths. Another way of saying the same thing is the Fed should only use forward guidance when relatively certain of the direction and timing of the next change in rates. Otherwise, it risks sounding more certain than it is and could end up positioning markets on the wrong side of the next policy change.
- NY Fed 1-Year inflation expectations rose from 3.46% to 3.67%.
- Initial jobless claims were 215k, while last week’s 215k figure was revised slightly to 217k. Continuing claims were 1.814 million, while last week’s 1.814 million was revised slightly lower to 1.806 million.
- Tensions flared again in the Middle East, with the US and Iran exchanging attacks, pushing oil prices higher.
Our Take
We are in a bit of a lull in terms of economic data and activity. This will pick up somewhat next week as we get CPI, PPI, and retail sales data and eyes will already start to peer towards the next FOMC meeting on July 28-29th. Parsing the limited remarks from Chris Waller or other Fed governors, and the minutes from the June FOMC meeting, offer limited clues as to the direction of policy. With UST yields elevated and real yields near year-to-date highs, investors have a more attractive opportunity to stay patient.
Corporate Bond Market Commentary
- Investment grade bond spreads were 2bp tighter to +75bp and total returns were -0.38%
- IG new issuance was lighter during the holiday week at $18.2 billion across 10 issuers. Books were 3.5x covered, NICs were 2.7bp, attrition was 26%, and deals were tightened 28bp on average from IPT to final pricing.
- IG fund flows were +$4.27 billion.
- High yield bond spreads were 8bp tighter to +275bp and total returns were +0.27% (BBs +0.24%, Bs +0.28%, CCCs +0.38%). Year-to-date returns are BBs +1.94%, Bs +2.59%, and CCCs +0.42%.
- HY fund flows were +$2.1 billion.
- HY new issuance was $2.35 billion including deals from Prestige Brands, Talos, Garda World Security, American Greetings, and Stonebriar.
Our Take
Corporate bond spreads are tight, but elevated US Treasury yields combine to present a conundrum for bond investors. BB spreads dropped to a near two-decade low of +148bp, but yields are still around 6%. The ratio of CCC to BB spreads widened out to over +800bp for the first time in 15 months. Perhaps this means BBs are overbought, or CCCs are oversold. We believe opportunities can be found across the credit-quality spectrum, with active security selection. For investors with exposure through a passive or index tracking fund, as more than 50% of the index is currently in BB-rated securities, a more flexible or actively managed approach could offer a better way to navigate today’s credit environment.
Municipal Bond Market Commentary
- The municipal bond index generated a +0.20% return last week.
- Municipal bond yields were -1bp, unchanged, unchanged, and -1bp and ratios were unchanged, -2%, -2%, and -2% to 58%, 60%, 64%, and 82% at 1, 5, 10, and 30 years respectively.
- Muni fund flows were +$2.292 billion, including $884 million into mutual funds and $1.408 billion into ETFs.
- Muni new issue volume was only $5.3 billion.
- This week’s calendar totals $15.7 billion, of which $14.8 billion is tax-exempt.
Our Take
30-year muni to US Treasury yield ratios are the tightest they have been over the last 90 days, indicating that they have rallied nicely, as we have been expecting. Reinvestment dollars remain seasonally strong through August, so as long as fund flows are at least relatively stable and new issue supply does not surge, longer duration bonds can remain constructive but given expected lower trading liquidity as we approach trader vacation season, there could be pockets of volatility that can be used to add exposure.
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