Welcome to summer.
Let’s look back at the previous six months and forward to the rest of 2024. We entered the year with tight corporate credit spreads but an attractive rates story for investment grade. Good economic growth for the United States and higher rates brought increased demand into the IG market.
The first half of 2024 was steadfast in its theme of “higher for longer.” Entering the second half of 2024, the Federal Reserve remains convinced they need to see more data indicating that inflation is lowering. Now, however, markets have the variable of election uncertainty to react to — not only domestically but abroad.
On the supply side, the first half of the year showed bonanza issuance from corporate issuers who have accepted the fate of higher rates. Issuance until May tallied up to $636 billion. According to sell-side projections, the year is slated to be closer to $1.5 trillion in full-year supply. The second half of the year has less issuance than the first half, creating a “stronger-demand, weaker-supply” dynamic.
Corporate spreads (by our calculations) have oscillated between a high of 78 basis points to a tight of 69 basis points. This is extremely tight by historical average spread measures at 161 basis points. We are noticing credit metrics weakening with high debt levels. However, credit ratings have remained stable.
On the valuation side, the 2s10s curve has remained inverted for the first half of the year, and the trend continues. The Bloomberg Government/Credit Index stands at -0.10% as of last Friday’s close. For the second half of the year, variables include Fed rate cuts, economic growth, and potentially lower yields.
Recent data releases showed more evidence of consumer softness. Retail sales in May came in lighter than expected, and consumer spending is growing closer to 2% in the first half of 2024. In the same vein, the housing market continues to struggle due to higher mortgage rates. Housing starts slipped to an annual rate of 1,277,000 in May—the lowest since June 2020.
The message coming out of all the Fed speak has remained the same: they need to see more inflation prints to gain further confidence that inflation will lower to 2%. To that end, Core PCE data will be released this Friday.
Treasury yields rose marginally throughout the curve last week.
Municipal yields barely had a pulse last week; yields essentially remained unchanged.
The ratios reflect changes from rising treasury and static muni yields.
Corporate yields followed Treasuries and showed incremental increases.
Geopolitically, the big news comes out of Israel, where Prime Minister Netanyahu signaled a potential end to the “intense phase of the war” in Gaza adding that he was open to a “partial deal” with Hamas. Netanyahu, however, vowed to continue fighting Hamas in the region of Gaza.
In domestic news, for the first time this year, a Fox News poll showed Joe Biden leading Donald Trump by a two-point margin, 50–48 percent. However, on the fundraising side, Trump outraised Biden for the second straight month.
What does any of that mean? Your guess is as good as ours!
The 5-year Breakeven Inflation Rate finished the week of June 21 at 2.27%, which was higher by four basis points from the close of June 14. The 10-year Breakeven Inflation Rate also finished the week at 2.23%, six basis points higher than the close of June 14.
As of June 21, 10-year quality spreads (AAA vs. BBB) were 0.92%, tighter by four basis points from the June 14 reading (based on our calculations). The long-term average is 1.70%.
Quality spreads in the taxable market are not attractive. They ended the week unchanged at 0.69%. High-yield quality spreads were higher at 2.99%.
Money Market Flows (millions of dollars)
Money market funds saw decreased cash flows in all classes.
Mutual Fund Flows (millions of dollars)
Bond fund categories saw mixed cash flows with increased flows in investment grade, high yield, and municipals.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced positive cash flows overall, with municipal ETFs seeing a decrease.
The supply of new issues is expected to be about $11 billion this week, continuing the heavy tax-exempt supply.
Consumer data was softer in May, with retail sales and home sales data slowing down. May PCE comes out this Friday. We reviewed corporate credit for the first half of the year, noting the variables for the second half, which include potential rate cuts and a slowdown in economic growth.
We will not be publishing next week in observance of the July 4th holiday.
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