The previous week’s economic data set the stage for last Friday’s employment report. Wednesday’s ADP employment report (+37,000 jobs compared to an expected +114,000) and last month’s revision of +60,000 led the markets to think that the employment release might be worse than expected.
The following table highlights some of the week’s most significant releases and CDI’s read on their impact:
What do all these numbers mean? Well, from our experience, it seems that the economy has not yet felt the impact of the chaos coming out of Washington. But there are some concerning trends.
Some of the soft data is still troubling. This is probably tied to tariffs and the estimated increase in debts and deficits from the potential passage of the “Big Beautiful Bill.”
What does CDI make of all this? Well, the Fed is probably on hold until there is more compelling evidence — either a sustainable decrease in inflation or a significant decline in growth (i.e., recession). Only time will tell.
CHANGES IN RATES
Last week, the five-year range of the Treasury curve outperformed all other tenors. This week, not so much. The market giveth and the market taketh away. Low yields for the week were reached by the close on Wednesday, no doubt fueled by the surprise ADP employment report.
All that was reversed out by Friday’s close. Friday’s employment report showed the U.S. economy was still stable (for now). The slope of the yield curve flattened over the week. The spread between the two-year and ten-year tenors was down .05% to 0.47% from last week’s 0.52%.
With the underperformance of the five-year Treasury security, a five-year Treasury security now yields 91% of a ten-year Treasury security for about 50% of the duration risk. Still a value.
The municipal market outperformed the Treasury market last week, as can be seen in the ratio changes. Market participants readily digested the supply bulge. Many may have viewed last week’s supply as one of the last chances to get invested before the summer doldrums. The slope between a two-year AAA general obligation bond and a similar security with a ten-year maturity is +0.57%. A five-year AAA municipal general obligation bond yields 91% of a similar security with a 10-year maturity, for approximately 50% of the duration risk. Also, still a value.
Municipal bonds outperformed their Treasury equivalents on the week as market participants anticipated the summer doldrums.
Corporate yields followed Treasuries and were higher for the week.
On Friday, the Supreme Court allowed DOGE members access to Social Security Administration data. Three judges objected.
“The unsigned order said that members of the DOGE team assigned to the Social Security Administration should have ‘access to the agency records in question in order for those members to do their work.’”
Justice Ketanji Brown Jackson wrote the dissenting opinion:
“‘In essence, the “urgency” underlying the government’s stay application is the mere fact that it cannot be bothered to wait for the litigation process to play out before proceeding as it wishes,’ she added.”
On the downside, all Americans now have a higher risk of having their personal data hacked. Nothing Bad Could Happen, Right?
U.S. veterans choose the 81st anniversary of the D-Day invasion to rally on the National Mall.
“It’s fitting that frustrated veterans chose June 6 — D-Day — as the moment to take a stand, as they hold a rally at the National Mall in Washington, D.C., that advocacy group Unite4Veterans describes as one of the largest rallies of military service members in decades. Like D-Day once did, Friday’s rally has the potential to reshape the political landscape ahead of the upcoming midterm election. Faced with the reality of Trump’s destructive VA policies, America’s troops are questioning their traditionally deep Republican loyalties at a level we’ve never seen before. Congressional Republicans, take note.”
Juxtapose this with next week’s military parade.
“The U.S. Army plans to mark its 250th anniversary with a pomp-filled procession through the streets of the nation’s capital, a date coinciding with President Donald Trump’s 79th birthday.”
“The event is designed not only to showcase the Army’s modern capabilities but also to inspire a new generation to embrace the spirit of service, resilience, and leadership that defines the United States.”
The cost of this endeavor:
“But the US Army Corps of Engineers, which has been leading on the effort to protect DC roads and infrastructure, is confident in the mitigation efforts the Army is deploying to minimize damage – efforts that have cost more than $3 million alone so far, Army officials said. The total cost of the parade could be as high as $45 million, officials have estimated.” Where is DOGE when you need it?
The breakup between the president and Elon Musk has reached the messy divorce phase.
Like any other messy divorce, it’s the children who suffer. Only this time, the children are the American people! The Wall Street Journal ran a headline that summed up the situation nicely:
“A Star-Crossed Bromance Comes Apart at the Seams” Love on the Rocks!
Does anyone else hear Taylor Swift’s “We Are Never Ever Getting Back Together” playing in their heads?
The 5-year Breakeven Inflation Rate finished the week of June 6 at 2.27%, two basis points lower than May 30. The 10-year breakeven inflation rate finished the week at 2.31%, three basis points lower than the May 30 observation.
As of June 6, the 10-year quality spreads (AAA vs. BBB) were 0.94% — 10 basis points lower than the observation on May 30 (based on our calculations). The long-term average is 1.69%.
However, investment grade is showing some movement at 0.98%. The high yield spread is lower at 2.89%.
Money Market Flows (millions of dollars)
Overall, money market fund flows were up last week.
Mutual Fund Flows (millions of dollars)
Cash flows into bond mutual funds were down compared to the prior week.
ETF Fund Flows (millions of dollars)
ETF asset classes saw a net increase in inflows over the period.
The supply of new municipal bond issues is expected to be closer to $17+ billion this week. This is yet another big new issuance week. If seasonal norms hold, the supply of new issues should begin to decrease. (“If” is the scariest word in risk management.) This follows the last four weeks of a large calendar of $10+ billion.
Last week was full of anticipation of what Friday’s jobs report would hold. Based on Wednesday’s ADP employment report, market participants got a bit ahead of themselves. The fixed income market ended the week basically where it began. Washington provided more chaos, making any type of long-term planning difficult at best. Friday’s unemployment report gave the Fed no reason to decrease or increase short-term interest rates.
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