Economic Commentary
- Oil prices have risen steadily and now sit at $92.45 for WTI and $101 for Brent.
- Fed Funds futures are now pricing in 1.8 hikes by year-end, 2 full hikes by January, and a total of 2.44 hkes by mid-2027.
- The Atlanta Fed GDPNow estimate for Q2 is down to 1.682%.
- The University of Michigan consumer sentiment index improved from 49.5 to 54.4. 1-year inflation expectations declined from 4.6% to 4.2%, while 5–10-year expectations remained steady at 3.3%.
- The Index of Leading Indicators declined -0.2%, down from +0.1% last month and below the -0.1% expectation.
- Tariffs are back in the conversation as the Administration threatened new levies on Canada, generic pharmaceuticals, and potentially across the board on other countries as previous exemptions are due to lapse.
- Initial jobless claims in the US fell from 209k to 187k, the lowest since level since 1969.
- The US engaged in a twelfth night of missile attacks since the MOU with Iran was abandoned, and the Iran-supported Houthis struck two Saudi oil tankers in the Red Sea. The number of ships transiting the Bab el-Mandeb Strait, which connects the Red Sea to the Arabian Sea, has fallen from 59 last week to 34, according to Bloomberg data.
- When compared to the two-month periods that preceded the start of a sustained tightening cycle (June 1999, June 2004, December 2016, and March 2022), the current two-month UST yield rise is similar to what was seen ahead of the 1999 hiking cycle, larger than before the December 2016 hike, and only modestly below the shifts that preceded the 2004 and 2022 cycles.
Our Take
The US economic calendar was effectively empty this week, and Fed officials were in their pre-meeting communications blackout. The resulting vacuum left the bond market more sensitive to UK developments and oil market swings in the short-term, and rates drifted higher. With yields now at the higher end of the trading range and almost 2.5 hikes priced in, we will see if more substantive economic data and some more direction coming out of the FOMC meeting next week can drive yields back down somewhat, or if continuing concerns about massive borrowing will continue to weigh on technicals.
Corporate Bond Market Commentary
- Investment grade bond spreads widened +2bp last week to +79bp and total returns were +0.06%.
- IG new issuance was $46.7 billion including deals from Goldman Sachs, SBA Communications, Morgan Stanley, JP Morgan, Bayer, PNC, and Bank of NY Mellon.
- IG fund flows moderated to +$2.48 billion last week.
- High yield bond spreads widened +4bp to +273bp and total returns were +0.04% (BBs +0.05%, Bs +0.04%, CCCs -0.11%).
- HY new issuance was $6.55 billion last week including deals from Validus Energy, Carrix, Beusa, Kennedy-Wilson, and Corelogic
- HY fund outflows were -$404.7 last week, while leveraged loans saw +$512 million inflows.
Our Take
Corporate bond markets were relatively unchanged last week despite the steady rise in oil prices, potential new tariffs, and increasing concern about the massive spending on AI. The calm last week has changed over to volatility and weakness this week. We are entering the height of summer doldrums when trading liquidity dries up, and price moves can be exaggerated. We think having dry powder and potentially raising more to step into potential weakness makes sense.
Municipal Bond Market Commentary
- The municipal bond index posted a -0.38% return last week, and the yield to worst rose 7bp to 3.75%, the highest since May 26th.
- Muni yields were +4bp, +7bp, +10bp and +9bp, and ratios were +2%, +2%, +2%, and +2% to 59%, 62%, 67%, and 85% at 1, 5, 10, and 30 years respectively.
- Last week’s new issuance was $13 billion, of which $12 billion was tax-exempt. The Aquarion $2.5 billion new issue deal attracted over $70 billion of orders (it is a new name that is double tax-exempt and is an essential service water provider). This week’s new issue calendar totals $11.6 billion, of which $9.7 billion is tax-exempt.
- Fund flows were +$1.667 billion, including $616 million into mutual funds and $1.051 billion into ETFs.
- Investors will receive $28.6 billion of principal payments as of August 1st.
Our Take
The drift higher in UST rates dragged muni yields higher despite continued inflows and solid technicals. If UST rates can stabilize around next week’s FOMC meeting, the large August 1st reinvestment dollars could drive some near-term recovery in performance.
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