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 4, 2024

Macro update

Last week the economic calendar was notable with Personal Consumption Expenditures (PCE) data leading the way. Core month-over-month PCE came in at 0.2%, as expected. Core year-over-year PCE—the Fed’s preferred inflation metric—now stands at 2.6% (Bloomberg, 9/3/2024).

Second-quarter GDP saw its second revision last week, with growth numbers revised upwards to 3% from 2.8% (Bloomberg, 9/3/2024).

All eyes this week are on Friday’s payroll numbers. Current expectations are for an increase in non-farm payrolls of 165,000 from August. This is the last jobs reading before the Fed’s next meeting. An unexpectedly strong or weak jobs number may affect the Fed’s decision regarding the overnight interest rate (Bloomberg, 9/3/2024).

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 little changed, with only slight weakness toward the back end of the curve. Both two- and five-year yields were unchanged, while 10- and 30-year yields rose by just two and three basis points (bps), respectively. AAA-rated benchmark tax-exempt yields now stand between 14 and 43 bps higher than at the start of the year (Refinitiv MMD, 8/30/2024).

The Bloomberg Municipal Bond Index gained 0.02% last week, outperforming Treasurys and strengthening year-to-date (YTD) performance to 1.3%. The Bloomberg US Treasury Index lost 0.52%, leaving YTD performance at 2.6% (Bloomberg, 8/30/2024).

Muni relative value has been rising in recent weeks because of muni price increases lagging behind Treasurys. Ten-year muni relative value compared with 10-year Treasurys now sits at 69%, just shy of the YTD high (Refinitive MMD, 8/30/2024).

Five-, 10- and 15-year A-rated municipal yields were 2.6%, 3.05% and 3.39%, respectively, as of the August 30 close. Related taxable-equivalent yields were 4.39%, 5.15% and 5.73%, respectively, assuming the highest combined federal tax rate of 40.8% (Refinitiv MMD, Parametric, 8/30/2024).

Mutual fund flows were positive for the ninth consecutive week, at $1 billion, with an even split between open-end fund and ETF contributions (JPMorgan, 8/28/2024).

Corporate bond update

US investment-grade (IG) corporate yields were higher across the curve last week. Two-year yields were one bp higher, while five- and 10-year yields increased eight and nine bps, respectively. Corporate yields are lower across the curve YTD, with two-, five- and 10-year yields down 33, 14 and four bps, respectively (Bloomberg, 8/30/2024).

The ICE BofA 1–10 Year US Corporate Index returned -0.18% for the week and 1.27% on a month-to-date (MTD) basis. The index outperformed like-duration Treasurys during the week by 0.08% and by 0.13 MTD (Bloomberg, 8/30/2024).

Corporate-only funds experienced inflows of $1.3 billion following the previous week’s inflows of $1.3 billion (JPMorgan, 8/30/2024).

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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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