Month over month CPI came in at 0.6% on Wednesday, above market estimates of 0.3%. Auto and apparel led the gain in prices, rebounding from the low-points of the lockdowns. Although gaining in prices, auto sales were weak in July, dragging down Friday’s retail sales number to 1.2% after survey estimates predicting 2.1%. Sales ex-auto and gas were better than expected coming in at 1.4% vs 0.8% estimates. Last week’s economic data lets us know that the economy continues to recover at a reasonable pace.
Congress has still not come to a deal for the new comprehensive stimulus bill and were scheduled to be on recess until mid-September. However, House Speaker Pelosi announced the House would reconvene this week to vote on legislation regarding the Postal Service.
On Aug. 24, New York state gyms will be able to reopen at 33% capacity and Florida’s governor announced the fewest new cases since June.
Fixed Income Market:
We experienced a bit of déjà vu last week with continued light market volumes; however, we did see significant movement in both spreads and absolute yield levels. Along with rising yields in longer dated UST’s, we saw a widening in both IG and HY bond spreads. IG corporates were out by 5bps, while HY backed up close to 20bps. This was the first reversal we’ve seen in close to a month, but in our view it’s too early to determine if this is reflecting a change in investor sentiment or just the market “catching its breath” following a month of tightening. Last week’s disappointing 30yr UST auction was a contributor to the yield back up as it was poorly received by investors and ultimately led to long treasuries rising in yield by 20bps to 1.45%. They are opening marginally lower this morning at 1.41%.
With just 80 days until November 5th, we expect the credit markets to increase their focus on the upcoming election. With this comes the possibility of increased volatility in both rates and spreads. We are currently close to 6 month tights in spreads and we see a growing risk that spreads will widen from this point.
It’s interesting to note that this spread widening occurred despite continued inflows into fixed income funds. For the week IG bond funds saw $6.48BLN, HY funds received $1.54BLN in new money and municipal funds took in $1.9BLN. Conversely, money market funds experienced $17.3BLN in outflows (all according to Lipper).
All three major indices posted again posted weekly gains, albeit modest, with DJI up 1.87%, NASDAQ up 0.09% and S&P 500 up 0.69%, with S&P again flirting with new all-time highs. This continues to be a major resistance level and the market continues to trend sideways as it digests Covid-19 data and the stimulus battle. Industrials, Energy and Consumer Discretionary were the leading sectors with Utilities, Real Estate and Communication Services underperforming. The economy continues to show steady progress with Initial Jobless claims falling below on million for the first time since March. And in July, retail sales exceeded pre-pandemic levels.
Risks in the Search for Yield: Credit
When an investor buys a bond, he/she is loaning the issuer cash for a certain period of time. During that time, the issuer promises to pay a coupon (interest) until the principal is returned at maturity. Issuers can range from the federal government to municipalities to corporations, and each has a different level of credit (default) risk.
Credit risk is the chance that the bond issuer will default on its payment obligations. United States government bonds (Treasury bonds) are considered to be credit risk-free due to the government’s ability to tax. Municipal and corporate bonds, however, are considered to have substantially more credit risk due to the uncertainty and variability of their revenue streams. Because of that increased risk, municipal and corporate bonds will have a coupon that is greater than that of Treasury bonds. Therefore, an investor should consider whether or not a higher coupon payment is worth the increased chance of an issuer’s default.
As with any investment portfolio, diversification is a great way to mitigate credit risk. By owning bonds from many different issuers across various industries, one greatly reduces the chances that all (or even many) of the issuers default on their obligations at the same time. One can also consider being diversified across different credit ratings from low risk to high risk, balancing preservation of capital with income needs.
Last Week's Economic Data August 17th
|Last Week's Economic Data||Actual||Survey|
|PPI Final Demand MoM||0.6%||0.3%|
|Initial Jobless Claims||963k||1100k|
|Retail Sales Advance MoM||1.2%||2.0%|
|This Week's Economic Data||Release Date||Survey|
|Initial Jobless Claims||8/20/20||908k|
|Existing Home Sales||8/21/20||5.40m|
This Week's Economic Data August 17th
|Interest Rates||Current||WoW||MoM||YoY||US Swap Spreads||Current||WoW||MoM||YoY|
|1 Month Libor||0.16%||(0.7 bp)||(1.9 bp)||(201.1 bp)||12-Month||+12 bp||+1.3 bp||(0.0 bp)||+2.3 bp|
|3 Month Libor||0.27%||+1.1 bp||(0.4 bp)||(186.8 bp)||2-Year||+8 bp||(0.5 bp)||+0.2 bp||(0.1 bp)|
|6 Month Libor||0.32%||(1.4 bp)||(1.4 bp)||(169.7 bp)||3-Year||+7 bp||(1.4 bp)||+0.7 bp||+2.7 bp|
|12 Month Libor||0.46%||+0.5 bp||(1.0 bp)||(148.5 bp)||5-Year||+6 bp||(1.1 bp)||+1.6 bp||+4.8 bp|
|Fed Funds Effective||0.10%||+1.0 bp||(202.0 bp)||7-Year||+1 bp||(0.6 bp)||+1.8 bp||+5.1 bp|
|SOFR||0.09%||(2.0 bp)||(204.0 bp)||10-Year||(1 bp)||+5.9 bp||+5.2 bp||+49.3 bp|
|US Treasury Yields||Current||WoW||MoM||YoY||30-Year||(41 bp)||+11.6 bp||+13.3 bp||+66.0 bp|
|12-Month||0.12%||(1.0 bp)||(1.5 bp)||(158.2 bp)||Equity Markets||Current||WoW||MoM||YoY|
|2-Year||0.15%||+1.4 bp||(133.1 bp)||Dow Jones||27,879||(0.2 %)||+4.5%||+7.7%|
|3-Year||0.17%||+3.1 bp||(0.0 bp)||(125.6 bp)||S&P 500||3,386||+0.4%||+5.0%||+17.2%|
|5-Year||0.28%||+4.3 bp||(0.5 bp)||(113.8 bp)||NASDAQ||11,122||+0.9%||+5.9%||+40.9%|
|7-Year||0.47%||+5.5 bp||+0.5 bp||(101.7 bp)||Currencies||Current||WoW||MoM||YoY|
|10-Year||0.67%||+1.4 bp||(133.1 bp)||Euro||1.1869||+1.1%||+3.9%||+7.1%|
|30-Year||1.41%||+1.4 bp||(133.1 bp)||Japanese Yen||105.9700||(0.0 %)||+1.0%||+0.6%|
|US Swap Rates vs 3ML||Current||WoW||MoM||YoY||British Pound||1.3110||+0.3%||+4.3%||+8.1%|
|12-Month||0.24%||+0.2 bp||(1.5 bp)||(155.9 bp)||Canadian Dollar||1.3193||+1.2%||+2.9%||+1.0%|
|2-Year||0.23%||+1.0 bp||+0.2 bp||(133.2 bp)||Australian Dollar||0.7213||+0.9%||+3.1%||+6.6%|
|3-Year||0.24%||+1.8 bp||+0.7 bp||(122.9 bp)||Swiss Franc||0.9058||+1.1%||+3.6%||+8.4%|
|5-Year||0.34%||+3.2 bp||+1.1 bp||(109.0 bp)||Israeli Shekel||3.4038||+0.1%||+0.8%||+3.6%|
|7-Year||0.48%||+4.9 bp||+2.3 bp||(96.5 bp)||Bitcoin||12,416||+4.7%||+35.6%||+16.3%|
|10-Year||0.67%||+7.3 bp||+5.2 bp||(83.8 bp)||Commodities||Current||WoW||MoM||YoY|
|30-Year||1.01%||+13.0 bp||+13.3 bp||(67.1 bp)||Gold||1,988||(1.9 %)||+9.8%||+31.3%|
|Crude Oil||43||+1.5%||+4.9%||(22.4 %)|