Market Commentary

The Fixed Income Brief: Rates Remain Steady but Demand for Spread Assets Continues

U.S. Treasury rates were relatively unchanged week over week but demand for corporates and municipals persists. Continued negative headlines around the increased number of COVID cases and the potential for a near-term economic decline in the face of expiring government financial assistance has investors seeking a stable place for their money. With Treasury yields so low, corporate and municipal bonds have become the next best option.

As the equity market gains recently look less based on economic fundamentals and more like merely betting on a cure than anything else, corporate bonds and municipal bonds are benefiting from the large amount of cash that needs to be put to work. We saw utilities and financials outperform this week as demand for yield and better bank earnings surprised the market.

Financials and utilities drive tighter credit spreads

Yields tightened mid-week due to unemployment claims, but rates ended the week little changed week over week with a slight steepening across the curve. Volatility remains low given all the Fed programs and stimulus currently baked into the bond market.

07.19.2020 - Chart 1 - Wow yield curve and spread changes for IG

Credit spreads ended tighter on the week driven by financials (-12 bps) and utilities (-8 bps). Financials were led by the banking sector, which saw earnings outperform expectations on the back of better trading volumes. Financials reversed most of the recent relative under performance, but still lag a number of other corporate sectors on a month-over month basis. Financials will be an interesting sector to watch as they have recently benefited from substantial debt issuance and volatility, but the performance of consumer loans could shift sentiment negative.

BBBs overall were the best performing as the search for yield continues.

07.19.2020 - Chart 2 - Spreads by sector for single A rated bonds07.19.2020 - Chart 3 - Spreads by rating

New issuance led by high quality global deals

The bulk of the issuance this week came out of supranational organizations and several large Japanese financials. The largest two U.S. deals were Occidental Petroleum and Hewlett Packard, both issuing in the 3-5 and 5-7 parts of the curve. Overall, of the larger deals the majority of the issuance was in the 3-5 part of the curve which was a break from seeing longer dated issuance over the past several weeks.

07.19.2020 - Chart 4 - Top IG new corporate issuances by duration

High yield trading continues to outperform with decent compression of spreads

The high yield space is now ~70bps tighter on the month. BBs traded tighter on the week again, led by financials, utilities, and IT. High yield overall continues to trade very well down in quality as well in lock step with recent equity performance.

07.19.2020 - Chart 5 - High yield YTW and changes by sub-sector

Munis continue to see inflows with only a slight uptick in supply, keeping valuations high

Municipals outperformed Treasuries as investors compete for bonds.

07.19.2020 - Chart 6 - Muni yields by rating and duration

The largest non-front-end deals of the week were the University of California (AA/Aa2) and Massachusetts School Building Authority (AA+/Aa2) with the bulk of the bonds coming in the 7-11 year buckets. New issuance has picked up a bit as of late but certainly not enough to satisfy demand, as deals continue to be oversubscribed by 5x and pricing remains on the tight side of guidance.

07.19.2020 - Chart 7 - Muni new issue summary by rating and duration

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