FOMC Commentary
- The FOMC left rates unchanged at its meeting today.
- The vote was 9-3 with Logan, Hammack, and Kashkari dissenting in favor of a 25-basis point hike.
- The commitment to return inflation to a hard 2% target was reiterated in both the statement and the press conference.
- The initial market reaction was lower short-term rates and a steepening of the yield curve.
- Chairman Warsh mentioned many times that there was no ‘inertia’ in the discussion, and that market signals are valuable now that participants are playing the ball.
Our Take
Even though markets are now only pricing in a ~58% probability of a hike in September, we believe the likelihood is higher, as the FOMC’s credibility could be questioned if they don’t deliver on their tough talk. The 30-year treasury bond’s initial reaction seems like a rebuke of today’s decision.
Economic Commentary
- Oil prices are below recent highs but have risen sharply over the last few weeks as the standoff with Iran shows no signs of resolution.
- Durable goods orders rose only 0.3%, below estimates of +1.8%. Orders excluding transportation were +0.6%, also below estimates of +0.8%.
- The Conference Board’s consumer confidence index was 90.8, down from a revised 92.2 last month and below expectations of 92.4.
- The Atlanta Fed GDPNow final forecast for Q2 is 1.54%.
Corporate Bond Market Commentary
- Investment grade bond spreads widened 1bp to +80bp and total returns were -0.88%.
- IG fund flows were +1.5 billion (an earlier estimate had a large outflow, which was caused by a large fund transfer).
- IG new issuance was only $11 billion, with deals from Equifax, Boston Gas, Conagra, Hercules Capital, State Street, Toronto-Dominion, Travelers, Netflix, Truist, and US Bancorp. NICs were 4.6bp, books were coincidentally covered 4.6x, attrition was 18.6%, and deals were tightened 29bp on average from IPT to final pricing.
- High yield bond spreads widened 6bp to +279bp and total returns were -0.57% (BBs -0.55%, Bs -0.53%, CCCs -0.90%).
- HY fund flows were +$534.4 million and leveraged loan funds continued to take in cash at +$503 million.
- HY issuance was $6 billion including deals from Athenahealth, Galaxy Helios, Magnolia Oil & Gas, Howard Midstream, Saturn Oil, and Freedom Mortgage.
Our Take
Corporate bond markets are struggling with the existential questions around the AI buildout. This uncertainty is weighing on the market, as incessant supply is re-pricing existing AI-related debt wider and generating questions on whether the market can continue to digest the enormous additional amounts that need to come over the next few years. Relative to other asset classes, the high-yield market appears better positioned from a technical standpoint, given its lower exposure to AI-driven market dynamics. Continued moderate economic growth should also help sustain healthy credit fundamentals. We see merit in maintaining some dry powder while favoring high yield over generic investment grade.
Municipal Bond Market Commentary
- The municipal bond market was down -1.07% last week.
- Muni yields were +16bp, +21bp, +23bp and +19bp and ratios were +2%, +3%, +3%, and +2% to 61%, 65%, 70%, and 87% at 1, 5, 10, and 30 years respectively.
- Buyers stepped in on Friday, when net flows into muni ETFs topped $1b billion for only the second time this year
- Last week’s new issue volume was $14 billion, of which $11 billion was tax-exempt. This week’s calendar totals $13 billion, of which $12 billion is tax-exempt.
- Muni fund flows were +$470 million, including $192 million into mutual funds and $278 million into ETFs.
Our Take
Municipal bond ratios are moving towards the middle / upper end of their recent trading range at 5-30 years and could mark a decent entry point for additional exposure, bolstered by the large August 1 reinvestment dollars entering the market.
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