The Fixed Income Brief: Bear Market Relief

Guest economic analysis and muni commentary: John Hallacy, John Hallacy Consulting

Assessing inflation and the Fed

It is not very often when a single set of data points can move markets but that is precisely what is transpiring today. The CPI came in at 7.7% YOY and the Core inflation rate registered 6.3%. The immediate reaction has been that inflation is finally starting to moderate and all the Fed actions to date are beginning to have the desired effect. Equities have rallied with what many hope will be lasting momentum. The chatter in the market is now that the Terminal Rate should be greater than or equal to 5%. Reality is settling in that the happy talk about the Fed easing up remains way too early. But it is very satisfying to see some moderation in the inflation rate. The CPI is not the favored inflation measure at the Fed, but it certainly may not be ignored.

Rates and yield across fixed income markets

As of this writing, the ten-year treasury is at 3.84% and is below 4% for the first time in some time. Anyone who was in buying treasury paper some days ago should be pleased with the price gains. Municipals have also benefited from the recent trends. Yields have decreased by meaningful amounts. Despite the outflows that continue to be substantial, supply has been relatively light and is well within the weekly averages for the year. One bright spot is that ETFs continue to gather assets as opposed to mutual funds that are experiencing the steady outflows. Perhaps, the ease of selling an ETF at a moment’s notice is contributing to the positive tone. A lot of retail buyers are once again focused on the taxable equivalent yields and on the relative stability and safety of the asset class.

Because the secondary market has become more important in an environment where new money supply is lighter, A.I. and algorithms may be becoming even more important in bond selection for those focused on individual bonds. Many platforms are competing for attention, but the competition is leading to greater innovation. On the credit side, the call for machine readable financials as opposed to just PDFs is garnering more attention. Proposed federal legislation on the topic is becoming a hot topic. We expect more debate ahead on this topic.

Developments on the election results

One would think that I would have delved into the election results before now. But the truth is that some of these other developments are having a great impact in the short run. Of course, the primary reason is that some of the election races have not been concluded. There is talk that we will not know the outcomes until next week. In the case of the Georgia senate contest, we will not know until after the runoff December 6. We may arrive at a point where the Senate continues to be split down the middle. In the meantime, it appears that Republicans will be the majority in the House. One may only conclude from these developments is that we will continue to have a high degree of gridlock when it comes to important fiscal policy. Markets prefer this stance because the prospects for tax policy changes and large fiscal programs will be diminished.

Lifting the debt ceiling on federal spending

A renewed focus on debt is coming back to the foreground with the debate about lifting the debt ceiling which is about to expire once again. It is easy to be blasé about this topic, but each round is unique and is driven by different factors. Most of the participants agree that a prospective outright default on Treasury debt would not be beneficial. Even some temporary disruption would be very disconcerting to markets. There must be compromise on the expense side to bring about swift resolution to the matter. Certain spending categories such as Medicare and Social Security will continue to be “protected” but most of the other federal spending budgets should bear some scrutiny.

Corporate bond market preparing for a recession?

On the corporate side, spreads for financials and industrials appear to be tightening. On the widening spread side are the airlines and some of the consumer-oriented companies. With the diminished M&A activity, we are not seeing a lot of blockbuster bell weather issuance. There is even a more recent trend with some companies paying down debt instead of rolling the paper. Some of this housekeeping may have to do with coming up on year end. But my reading is that some companies are girding for the highly anticipated recession. Good balance sheet management scores points with investors.

Many thanks to our veterans

At this time, we must remember to thank our veterans for their service. We appreciate that we would not have our freedoms and our free markets without their selfless contributions to the greater good.

More about John Hallacy

John is an accomplished municipal and fixed income analyst, respected and recognized by the industry with over 35 years of experience at major financial firms including S&P’s Global Ratings, FGIC, Bond Investors Guaranty, Merrill Lynch, MBIA, Bank of America, Assured Guaranty, and most recently The Bond Buyer. A leading expert in state and local fiscal affairs. John’s experience includes ratings, insurance, public finance and sell side research.

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