The latest Consumer Price Index data revealed that inflation fell 0.1% in the month of June, putting the 12-month rate at 3%, the lowest level in 3 years. Treasury yields (^TNX ^TYX, ^FVX) have begun to dip in response to this morning’s inflation print.
abrdn head of North American fixed income Jonathan Mondillo joins Catalysts to discuss the bond market outlook after the latest CPI data:
“I think that really depends on whether you’re thinking through an institutional investor lens or a retail investor lens. I’d say that we think Treasuries are good. Obviously, we see that with the rally this morning, we actually think corporate bonds look really attractive at this moment for institutional investors. But I think the real shining diamond as it is right now, for those investors that can take advantage of the tax exemption, is tax-exempt munis [municipal bonds]. They’ve outperformed on a year-to-date basis despite the rally in Treasury rates. They continue to compress. We continue to see outperformance.”
For more expert insight and the latest market action, click here to watch this full episode of Catalysts.
This post was written by Nicholas Jacobino
Video Transcript
Cp I print showing that inflation once again remains the trend, at least continuing to cool as Wall Street debates what this all means for Fed rate cuts.
We’re seeing that reaction play out in the bond market.
Specifically, you got the 10 year yield off just around 10 basis points.
But you really see that reaction across the curve and actually 10 year now, that 42 level here to talk about what?
Ultimately this means going forward.
We want to bring in Jonathan Manilow.
He is Aberdeen’s head of North American fixed income.
Jonathan, it’s great to have you on set here with us.
So first, just give us your reaction to this print and really the and also what is playing out right now in the bond market with the drop in yields this morning?
Yeah.
I mean, thank you for having me here first of all, but a little bit cooler than I think most people were expecting.
Uh, what does that mean for the bond market?
I think bond investors are probably pretty happy when they see, you know, Bonds.
Obviously rallying.
I think when we talk to investors that have been parked on the sideline.
Obviously a lot of cash.
Still in money market funds, the question becomes, you know, when do I wanna get more fully invested in?
We think credit.
And we think credit looks really good right now.
Operationalize what you just said for me.
I wanna dig into both of those options.
So let’s say you’re parked on the sidelines.
What are you advising that folks think about doing?
I think that really depends on whether you’re thinking through an institutional investor lens or a retail investor lens.
I’d say that we think Treasuries are good.
Obviously, we see that with the rally this morning.
We actually think corporate bonds look really attractive at this moment, uh, for institutional investors.
But I think the real shining diamond as it is right now, uh, for those investors that can take advantage of the tax exemption is tax exempt.
Unis They’ve outperformed on a year to date basis.
Despite the rally and Treasury rates, they continue to compress.
We continue to see out performance, and I think all in yields on an after tax basis look really attractive to both Treasuries as well as their corporate counterparts.
So what does that upside then look like, Do you think?
I mean, you look at the real out performer.
Thus far this year it’s been high yield muni.
They’re up over 4% on a year to date basis relative to Treasuries, which maybe after today’s rally is possibly flat year to date.
But the yield that you can get on a taxable equivalent basis in high yield muni is now close to 9% which we think looks really attractive for what is a very high quality asset class.
Investment grade munis.
Also tremendous amount of pick up there.
You can pick up about 40 to 50 basis points as opposed to an investment grade corporate bond, not apples to apples to do asset classes, but a good comparative in the in those yields.
We love a muni chat.
It’s people think it’s boring, but I mean the returns they they prove themselves.
But going going back to the broader Treasury market.
Uh, you mentioned folks who are already in and seeing this rally and obviously having a great day, what should investors who are already in the Treasury space be thinking about doing well?
Let’s see where they’re parked right now.
I mean, they’re They’re clearly parked short, right?
And I think when you look at the rally and rates, that’s where we would expect things to sort of pare back as the Fed Fed starts to cut.
Um, so I think that investors really not need to start thinking about not only what are their asset classes are gonna outperform Treasuries as we get that cut cycle, but also where do I need to be in terms of duration?
We think maybe pushing out slightly in duration makes the most sense at this point in time.
The rally that we’re seeing today in Bonds is that at all a bit overextended, given the fact that there is still much so uncertainty in terms of the timing of the Fed and maybe what exactly this trend for inflation is going to look like in the coming months, even though things are improving?
I think so.
And you can look at some of the comments made on Capitol Hill by Chairman Powell, Clearly dovish, right?
We wouldn’t disagree with that, but I think as we go forward over the next 2 to 3 months, you’re gonna start to see base impact on those inflationary data points and possibility of sticky inflation or even a little bit of volatility in that inflation number.
So I think we would probably temper investors expectations.
We’re not expecting to see a dramatic fall off in inflation or a dramatic fall off in that growth picture.
And therefore, we think that still that cut scenario is gonna be much protracted relative to probably where the markets thought entering this year.
I know you’re fixed income, but I’m just curious with this inflation data we’re all excited here about Oh, it’s cool.
A.
That’s great news.
But are consumers at home feeling that to the degree that you’re able to talk about that, I’m just curious?
What the read through is of the data we’re seeing to an actual feeling of coolness in the broader economy?
Uh, I think to a certain degree, it’s probably better today than it was six months ago or even 12 months ago.
You can see that with energy prices coming down, gas prices coming down, uh, that being said, you know, I think November is going to be a big, uh, a bellwether for how families feel when they go to the grocery store how they feel about inflation?
Um, you know, because I do think to your point, uh, main Street is still sort of feeling the impacts of that.
Are you expecting since we did bring up November, are you expecting increased volatility surrounding the election?
I guess in terms of what investors should be pricing in or expecting, maybe in of that uptick in volatility, at least it looks like historically speaking that we tend to see that spike maybe happen.
End of September beginning of October, I’d say more likely than not.
You can certainly see that with issuance this year.
Corporate bond issuance, municipal bond issuance, corporate bond issuance almost at record levels for the first six months.
Municipals up 35% year to date.
And I think a lot of those issues are pulling forward that issuance with an expectation that who knows, come September October into November, what that volatility is going to look like right volatility across the board.
But the Fed unknowns, White House unknowns, a lot on the table here and globally.
So Jonathan, thank you so much for joining us to break it all down.
With pleasure.
Thank you very much.
That was Jonathan Mondello.
He’s Aberdeen’s head of North American fixed income