Weekly Fixed Income Update

Interest rates, inflation, central bank action—all these and more can impact fixed income. Stay on top of the market with our weekly update.

September 10, 2024

Macro update

Last week the market focused on payroll numbers from July. Nonfarm payrolls increased by 142,000 last month, lower than the surveyed average of 165,000. The prior two-month payroll net revision was -89,000. These data points suggest a softening labor market and may give the Federal Open Market Committee (FOMC) the green light to decrease the overnight rate during the meeting on September 18 (Bloomberg, 9/6/2024).

Fed governors Christopher Waller and John Williams indicated the time has arrived to start cutting rates. The question that remains is the pace of those cuts. Markets are currently pricing in 32 basis points (bps) of cutting for the Fed’s September meeting (Bloomberg, 9/6/2024).

The market will react this week to Consumer Price Index (CPI) and Producer Price Index (PPI) data from July. Current market expectations for month-over-month core CPI in August are 0.20%, the same as the previous month. Year-over-year core CPI is expected to read 3.20% (Bloomberg, 9/6/2024).

Fixed Income Five by Kevin Lynyak

What are the fixed income five? These helpful data points shed light on what’s driving the narrative in fixed income investing and where markets might be headed. (August 5, 2024)

Municipal bond update

Benchmark AAA municipal yields finished last week lower by eight bps across the curve. AAA-rated benchmark tax-exempt yields now stand between six and 35 bps higher than at the start of the year (Refinitiv MMD, 9/6/2024).

The Bloomberg Municipal Bond Index gained 0.49% last week, sharply underperforming Treasurys, while strengthening year-to-date (YTD) performance to 1.81%. The Bloomberg US Treasury Index gained 1.41%, vaulting YTD performance to 4.01% (Bloomberg, 9/6/2024).

Muni relative value has been elevated in recent weeks due to muni price increases lagging those of US Treasuries. Ten-year muni relative value compared with 10-year Treasurys now rests at 71%, just shy of the 72% YTD high (Refinitiv MMD, 9/6/2024).

Five-, 10- and 15-year A-rated municipal yields were 2.52%, 2.97% and 3.31%, respectively, as of the September 6 close. Related taxable-equivalent yields were 4.26%, 5.02% and 5.59%, respectively, assuming the highest combined federal tax rate of 40.8% (Refinitiv MMD, Parametric, 9/6/2024).

Mutual fund flows were positive for a tenth consecutive week, at $956 million, which was entirely driven by open-end inflows, with ETFs providing only the slightest headwind of a $22 million outflow (JPMorgan, 9/4/2024).

Corporate bond update

US investment-grade (IG) corporate yields declined across the curve last week. Two-, five- and 10-year yields all decreased 24 bps. Corporate yields are lower across the curve YTD, with two-, five- and 10-year yields down 63, 45 and 28 bps, respectively (Bloomberg, 9/6/2024).

The ICE BofA 1–10 Year US Corporate Index returned 0.84% for the week and month to date (MTD). The index underperformed like-duration Treasurys during the week by 0.15% and MTD (Bloomberg, 9/6/2024).

IG mutual funds and ETFs experienced inflows of $7.5 billion, a slight increase from the previous week’s inflows of $7.3 billion. Corporate-only funds experienced inflows of $3.4 billion following the previous week’s inflows of $1.7 billion (JPMorgan, 9/6/2024).

Corporate one- to 10-year IG bond yields have fallen 50 bps YTD and ended last week at 4.6% (Bloomberg, 9/6/2024).

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The views expressed are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.

An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads, and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Longer-term bonds typically are more sensitive to interest-rate changes than shorter-term bonds. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer’s ability to make principal and interest payments.

Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer, and general market liquidity. When interest rates rise, the value of corporate debt securities can be expected to decline. Debt securities with longer maturities tend to be more sensitive to interest rate movements than those with shorter maturities. Company defaults can impact the level of returns generated by corporate debt securities. An unexpected default can reduce income and the capital value of a corporate debt security. Furthermore, market expectations regarding economic conditions and the likely number of corporate defaults may impact the value of corporate debt securities.

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