Economic Commentary
- Retail sales unexpectedly fell 0.6% in July, the first monthly decline in 2026 and well below the consensus estimate for a 0.1% increase. Sales ex-autos fell 0.3%, and control group sales fell 0.4%, missing estimates for a 0.3% increase. Gasoline, autos, and non-store retailer sales drove the miss. Non-store retailer sales fell 2.2% in July, the statistical payback from Amazon moving Prime Day from July to June this year. After adjusting for inflation, the three-month average monthly change in total retail spending is now 0.34%, exceeding the 0.29% average for January-April and 0.09% for all of 2025.
- Treasury announced a surprise increase to the size of their buyback operations for longer-dated US Treasuries from a current maximum of $2 billion to at least $4 billion. The initial reaction lowered long-term rates, but the effect was short-lived.
- Federal Reserve minutes from the July meeting showed many officials indicated that raising rates would be necessary if inflation didn’t decline. The word many in Fed-speak translates to nearly half. There was also discussion about the frequency of FOMC meetings and the future approach to the Fed balance sheet runoff.
- Housing starts fell 12.4% in July, and pending home sales fell 2.3%, both demonstrating the pressure that continues to weigh on housing from high mortgage rates and high construction costs.
- Import prices fell 0.4% in July, and June’s initially reported 0.3% increase was revised to a 0.3% decline. Energy prices caused the decline in import prices and, while they matter for pass through risks, they tend to zero out over time. Ex-petroleum import prices rose 0.3% and accelerated from 4.3% year-over-year to 4.5%. The index for computer and electronic manufacturing is also accelerating, underscoring the inflationary effect of the AI buildout.
- The NY Fed’s Empire Manufacturing index posted its highest headline reading in four years. The survey details — robust growth in input prices, solid demand, longer supplier delivery times, and optimistic expectations — echo the story told by the ISMs throughout this year.
Our Take
Treasury Secretary Scott Bessent’s attempt to bolster long-dated US Treasuries with the surprise increased buyback was short-lived. The move higher in rates has been attributed to higher rates in Japan and other sovereign bond markets, persistent fiscal deficits without progress in sight, the wave of AI-related corporate issuance crowding out UST buyers, and stubborn inflation. The buyback announcement feels like trying to place a finger in the dyke when a tidal wave is already approaching. However, if the announcement is a real signal of concern and focus and is followed by genuine attempts at fiscal reform or other fundamental measures, that could potentially start to turn the momentum around.
Corporate Bond Market Commentary
- Investment grade bond spreads widened +2bp to +80bp and total returns were -0.27%.
- IG fund flows were +$2.95 billion.
- IG new issuance was $56 billion across 37 issuers. NICs were 5.5bp, book coverage was 3.2x, deals were tightened 20bp on average from IPT to final pricing, and attrition was 36%.
- High yield bond spreads tightened -3bp to +267bp and total returns were +0.15% (BBs +0.18%, Bs +0.16%, CCCs -0.13%).
- HY fund flows were +$167.1 million and leveraged loan funds saw $987 million of inflows.
- HY new issuance was $7 billion including deals from Zenith Arc (Jane Street data center), Gainwell Technologies, Valvoline, WaterBridge Infrastructure, Ryman, Encompass Health, Griffon, and CrossCountry Mortgage.
Our Take
The investment grade market showed some signs of fatigue and indigestion, with attrition rates rising to 36% and new issue concessions rising to 5.5 basis points. While there should be some respite now through Labor Day, there are palpable fears for the tsunami that could come after the holiday. With long-end treasury rates already pushing higher, tilting toward more credit intensive bonds benefitting from the strength in the economy rather than more rate sensitive higher quality bonds makes sense until long-end yields show signs of stabilization.
Municipal Bond Market Commentary
- The municipal bond index returned -0.04% last week.
- Muni yields were -1bp, -1bp, -1bp, and -0.4bp, and ratios were unchanged, unchanged, -1%, and -1% to 61%, 64%, 68%, and 84% at 1, 5, 10, and 30 years respectively.
- Fund flows were $970 million, including $408 million into mutual funds and $562 million into ETFs, a slowing from previous weekly inflows.
- Last week’s new issue calendar totaled $13.3 billion, of which $11.2 billion was tax-exempt.
- This week’s calendar totals $18.4 billion. If all of this week’s supply materializes, that would bring month-to-date issuance to almost $50 billion, which would be the largest total for August since at least 1990.
Our Take
Municipal bond issuance is rising just as we have passed the favorable summer reinvestment dollar period and head into Fall when those reinvestment dollars are lower. For buy and hold muni investors with laddered portfolios or targeted maturities who don’t need to worry about interim price movements, locking in these higher yields on could be great; for those who can be more opportunistic, better entry points could lie ahead.
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