Bond Market Update: August 5 -12, 2022

Last week

The good news released last week that inflation may have peaked was a relief for equity investors but the fixed income market, while experiencing a bit of a roller coaster ride, finished relatively flat for the week. 

The SWBC municipal strategy had a relatively strong week with a positive return of .11% vs the Bloomberg Muni index of -.08% and the Bloomberg long-term muni index of -.27%. Adding to the strong relative performance of the fund were the Municipal closed-end fund holdings as the first trust municipal closed-end fund index had a positive total return of 1.83%. The overlay portion of the portfolio, which is currently short 10-year Treasuries and credit spreads, was a net negative to performance as credit spreads narrowed during the week while the Treasury position was basically unchanged.

Last week ended with Lipper reporting the first outflow of investor cash in three weeks but considering the historic amount of cash due this month from bonds maturing, being called and dividend reinvestment it’s not too concerning. Tax-exempt ratios to Treasuries continue to be extremely overvalued on the short end of the curve with tax-equivalent yields below comparable Treasury yields. The 10 and 30-year part of the curve is more fairly valued with the 30-year being the cheapest.

This Week

This coming week brings another big batch of economic indicators with manufacturing, housing, and retail sales on tap to be released. In addition, the FOMC minutes from the last meeting will be released and may give investors a better view of what the Federal Reserve may do in the future. Tax-exempt Municipal issuance will be slightly higher than average but nothing the market cannot handle considering the strong technical position of the market. Taxable Municipal bond issuance will be over 2 times the weekly average but should be easily absorbed as they are relatively cheap to Treasuries.

Definitions:

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.

• The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield.
• The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
• The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.
• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.
• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September.
• The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September.
• The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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