Market Commentary

The Fixed Income Brief: How Do You Spell Relief?

This week we saw relief from both Washington and from the CPI data; as the yield curve steepens, fixed income investors begin to bet on the next fed hike.

Fixed Income Trivia Time: How many RIAs are there in the U.S.?

Equity markets have closed at new all-time highs, on the back of both stimulus and better than expected weekly jobless claims. It is not news to anyone that the ~$1.9 trillion stimulus bill will have large implications on both the economy and the bond market. The $1.9 trillion package is close to 8.5% of GDP and expectations are that $1.1 trillion of it (4.9% of GDP) will be disbursed in some capacity this year. When looking at the economy, the stimulus checks will drive growth primarily in Q2 2021, but additional stimulus will come in 2022 and potentially cushion any large YoY swings. Investors expect to see job growth to pick-up, specifically in the second half of the year as states re-open the economy. This should drive to a lower unemployment rate and investor expectations are for pre-pandemic unemployment levels by as early as next year.

2’s-30’s steepen ~50bps from early February

The yield curve continues to steepen and 2’s-10’s are 60bps steeper on the year. Obviously, the steepening of the yield curve brings the conversation of when the Fed will hike rates again. As of this week, the market has started to price in the first FOMC hike to Q1 2023. The highly anticipated Fed meeting on March 16-17 will highlight their outlook and reemphasize what will be needed from the economy and inflation to warrant an interest rate hike in 2023.

03.14.2021 - Chart 1.1 - yield curve03.14.2021 - Chart 1.2 - WoW yield curve

Credit spreads tighten as bond spreads end flat

Credit indices tighten in line with equities and GDP growth expectations. Bond spreads sell off earlier in the week and then tighten to end the week about flat. Bond spreads are not fully insulated from inflation expectations and total returns can remain negative. High yield has outperformed investment grade throughout 2021; it will be interesting to see how this latest rally in HY and energy names plays out in the primary market.

03.14.2021 - Chart 2.1 - corporate spread curve03.14.2021 - Chart 2.2 - WoW corporate spread curve03.14.2021 - Chart 3 - credit index spreads

As per Moody’s, positive outlook for corporate earnings favors narrower credit spreads.

03.14.2021 - Chart 4 - spreads by sector for the IG agg03.14.2021 - Chart 5 - spreads by rating

Nat Rural sees $12bn of debt downgraded

S&P had a busy week of both upgrades and downgrades. S&P issued a downgrade to National Rural’s secured and unsecured debt, revising its outlook to negative. This is based on the potential for elevated credit stress for electric utilities operating in Texas following last month’s winter storm that resulted in blackouts and unprecedented power costs.

03.14.2021 - Chart 6 - S&P rating changes this week

Muni yields tighten after two week selloff

$350-500bn of the stimulus package is earmarked for state and local governments. State budgets have already been finalized for the year so expectations for additional spending from the stimulus are more likely relevant in 2022. Muni investors believe this will greatly diminish new supply for 2021 and 2022 and as a result, spreads in munis tightened on the back of the news.

03.14.2021 - 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, Mar. 11, 2021.

Fixed Income Trivia Time Answer: ~13,000

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