Market Commentary

The Fixed Income Brief: Flash Dance

The flash move for Treasuries this week shows the jitters of fixed income investors, worried of the impact of stimulus and potential inflation.

Fixed Income Trivia Time: Of the 1mil+ CUSIPs in the muni sector, how many ultimate obligors are there?

This week’s market moves were similar to a patient who gets flu-like symptoms from taking the COVID vaccine. It is a little uncomfortable, but worth it in the longer run to protect the person from more serious implications in the future. Not to say this move has ended yet, but the risk off tone in equities and the selloff in rates markets are healthy signs for a market to maintain its longer-term footing. As the market deals with positive vaccine news, large fiscal stimulus, higher oil prices, and higher future Treasury issuance, it is only natural to see yield moves cause a pause for risk markets. J&J’s one dose vaccination expected approval only added to that sentiment, and rather than equity markets embracing it as a positive, they began to see rising yields as a risk to the already priced in recovery starting to take hold.

Data this week was generally positive as the global economy continues to thaw out with the help of continued progress on the vaccination front. Strong data on housing, where Case-Shiller showed YoY price increases of +10.1% and new home sales beat expectations (923k vs 885k exp.), up +4.3% MoM. Existing home sales saw a decline of -2.8% vs. -0.2% exp. MoM, only because there is not enough supply at the moment. Housing will be a key area of the market to watch as rates will have a direct correlation with how well the sector sustains its torrid pace. On the jobs front, weekly initial jobless claims came in at +730k vs. 838k exp., and over 100k better than last week’s +841k. On the inflation-risk front, the PCE price index (the Federal Reserve’s preferred inflation gauge) rose +0.3% for the month, slightly ahead of the 0.2% expected. YoY it’s up just +1.5%, matching estimates, leading to less concern as the Fed had already indicated they would let inflation run hotter than 2% in order to get more people to work. This means there’s still plenty of bandwidth in terms of the central bank being comfortable not reducing its super accommodative stance anytime soon.

Treasury yields lurch higher as selloff trend continues

Treasury prices declined this past week, sending yields significantly higher at one point before settling in slightly higher WoW. 10yr Treasuries that started the week ~1.35% saw an intraday ‘flash move’ to 1.60% mid-week on its way to settling around 1.46%. The 30yr Treasury was up +6bps from 2.14% WoW and reached a high of 2.30% after settling back to 2.20%. The same pattern emerged across the curve, as even the stubborn 2yr note traded off +7bps at one point, finally breaking out after much resistance to recent headlines. There was a 5yr note auction on Wednesday, where the new issuance came +20bps higher than the prior auction at 0.621% and ended the week even higher at 0.77%.

02.28.2021 - Chart 1.1 - yield curve02.28.2021 - Chart 1.2 - WoW yield curve

Credit selloff on back of volatile week

Spreads sell off on back of inflation concerns. This move is in line with equities, and the goldilocks scenario of a growing economy with increased stimulus hit a speed bump after months of tightening. These small reality checks tend to be buying opportunities for dry powder rather than a prolonged move of negative sentiment.

02.28.2021 - Chart 2.1 - corporate spread curve02.28.2021 - Chart 2.2 - WoW corporate spread curve02.28.2021 - Chart 3 - credit index spreads

Energy sector was again the winner this week which ended flat. It is notable to mention that on the month, energy is the only sector that is wider (12bps). Materials was the winner on the month, closing 8bps tighter.

02.28.2021 - Chart 4 - spreads by sector for the IG agg02.28.2021 - Chart 5 - spreads by rating

S&P sees deterioration in energy and gas, even as prices rise

S&P downgraded a handful on energy and gas names this week, most notably is a tranche of Exelon that moves to BBB-.

02.28.2021 - Chart 6 - S&P rating changes this week

Muni yields continue to rise with the rate selloff

Municipal bonds sold off again for the second week on the back of the continued Treasury selloff. There is a sense that investors are happy to engage here at higher yield levels but that yields could still go potentially higher so not a huge rush to lock all their cash at this point. There is still no sense that selling is taking place given the continued supply / demand imbalance, though now it seems investors can be a little more patient than they were a few weeks ago.

On the fundamental front, Puerto Rico reached a deal with bondholders to reduce its debt, a critical step to moving forward. The aim is for Puerto Rico to exit bankruptcy in 2021, seeking court approval by this fall. The terms indicate that the GO bondholders would receive $14.4bn - $7bn in cash and the rest through new securities issuance.

02.28.2021 - Chart 7 - muni yields by rating and duration

*Disclosure on all charts: Figures shown above are the weighted aggregate of bonds that currently have an IDC price and based off transactions over the past 2 weeks. This may create anomalies in the data but aligns with our effort to reflect actual market conditions. Data pulled as of end of day Thursday, Feb. 25, 2021.

Fixed Income Trivia Time Answer: ~54,000

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