US Weekly: Bull Steepened into a Bearish Market

Executive Summary

Treasury Markets: Treasury yields declined materially across the bull steepened curve following dovish signaling from Chair Powell at Wednesday’s FOMC press conference and the slew of bearish economic data released Thursday and Friday. Between Wednesday and Friday, the market priced in nearly two additional rate cuts for 2024, now totaling 4.6 cuts by year-end following the sharper-than-expected contraction in the ISM Manufacturing PMI (46.8 reading against consensus at 48.8); a notable miss in July’s payrolls (+114k job adds against consensus at +175k), which was exacerbated by 29k of downward revisions; and uptick in the unemployment rate to 4.3%, the highest since October 2021 (4.5%). The unexpected softening in the previously rock solid labor market dashed hopes of a soft landing and pushed recession concerns back to the forefront, which resulted in the largest day-over-day move in the 2Y (-27 bp) and 10Y (-19 bp) yields year-to-date. The 2Y ended the week 50 bp lower to 3.88% as the 10Y declined 40 bp to 3.79%, both falling to recent lows last seen in May ’23 and July ’23, respectively. This further eased the curve inversion by 10 bp to just 9 bp inverted, the least inverted since July 2022.
Credit Markets: Credit underperformed across-the-board amidst last week’s flight to quality, with IG widening 11 bp to 106 bp and HY gapping 62 bp wider to 372 bp, driving excess return losses of 0.87% and 1.74%, respectively. Investors reached up the rating spectrum across both indices, resulting in outperformance among AAAs and AAs, which both widened 8 bp relative to single-As (10 bp) and BBBs (13 bp), and BBs and single-Bs, which widened a comparative 58 bp and 64 bp, respectively, relative to CCCs (81 bp). In IG, the material downshift in UST yields outweighed the relatively smaller spread widening to pull corporate yields 32 bp lower to 4.96%, the lowest since early February 2023, producing a whopping +2.07% weekly total return. HY yields rose 15 bp to 7.74% as the decline in rates only partially offset the outsized HY spread widening, resulting in a slight 0.12% total return loss for the week.
Municipal Markets: The Muni Index earned 1.07% last week, the best one-week performance since December 2023, and the Broad Taxable Muni Index earned an eye-popping 2.92%. This week’s new issue calendar totals $17.3 bn, which would be a 2 1/2 year high and more than double the 52-week average. Notable deals expected to price include a big state GO, two airports, a bunch of college bonds and the 3rd biggest AMT deal of the year.
Equity Markets: Equity markets started the week off positively with all three major indices and the Russell 2000 rebounding on Wednesday following the dovish FOMC meeting before weaker-than-expected economic data sparked a broad selloff that pushed all four indices firmly into the red for the week. The Russell 2000 reported a steep 6.7% decline, followed by the Nasdaq (-3.3%), which fell to 10% below the all-time high posted a month ago. The DJIA (-2.1%) and S&P 500 (-2.0%) fared better in comparison, just 4% and 6% below record highs set last month. Volatility spiked to an intraday peak of 29.66, last seen amidst the regional banking crisis in mid-March 2023, before settling at 23.39, 42.7% higher on the week.
Commodity Markets: Despite market volatility, metal prices experienced a mixed week, with base metals declining, while gold, steel, and bulk commodities saw slight increases. Crude prices declined to near the lows of 2024 on concerns over demand from the U.S. and China. WTI and Brent closed the week down 5% to $73.52/bbl and 5% to $76.81/bbl, respectively.
Fund Flows: Net flows into fixed income ETFs fell 35% from the week before to $5.6 bn, just 4% less than the 13-week average of $5.8 bn. IG corporate bond ETF flows totaled -$150 mn but 37 IG ETFs had positive net flows that totaled $1.53 bn while 9 ETFs lost a total of $1.55 bn (mostly from LQD). HY ETFs added $120 mn; on Friday, ETF turnover totaled 153% of the amount of HY bonds traded. Muni ETF flows hit a 39-week high of $1.3 bn. This week we have included our table of monthly fixed income mutual fund and ETF flows and the July market snapshot of the bellwether fixed income ETFs.