PERSPECTIVES

• Signs of weakening US consumer confidence and spending, and a slowing service sector and housing market, all signaled slower than expected growth and — combined with elevated inflation and policy uncertainty — stirred concerns of stagflation in the market.
• The Fed’s favored inflation metric cooled to a 2.6% annualized pace, but remains well above the Fed’s target rate. Slow progress on taming price pressures overall should keep policymakers cautious on further easing.
• The bond market saw a significant rally on renewed growth concerns. Interest rates ended the month at their lowest levels of the year.
  
  

TAXABLE BOND MARKET UPDATE & OUTLOOK

• Declining consumer confidence, a big miss in retail sales, softer services data, and slower housing starts with lower builder confidence have dampened the outlook for Q1 GDP growth. DOGE, and the consequences of a shrinking US federal footprint, are also weighing on growth sentiment.
• The labor market report was a bit weaker than expected, but an uptick in average hourly earnings and positive revisions struck just the right note to allow the Fed to stay on the sidelines and remain vigilant in the fight against inflation. Jobless claims have ticked up in recent weeks but can be traced to seasonal-adjustment factors.
• The yield curve saw a significant bull flattening, as 10-year and 2-year Treasuries rallied 28 and 15 bps, respectively. The 2s/10s yield spread relationship sits at its tightest level since mid-December. The 3-month/10-year relationship moved back into negative territory, from its recent high of 47 bps in mid-January.
• The futures market is pricing in 2.75 rate cuts (68 bps) for 2025, with the first full cut coming in June.
• Reduced risk sentiment drove investment grade (IG) and high yield (HY) spreads wider by 8 and 20 bps, respectively. This marks the weakest monthly spread performance for IG since June 2024, and the widest spread level since early October. HY spreads reached their widest level since early January. Despite the rate rally, yields in the corporate sector remain attractive on a post-global financial crisis (GFC) basis.
• The securitized sector outperformed comparable-duration Treasuries, primarily fueled by the strength in mortgage-backed securities. Although rate volatility posed a challenge, spreads tightened as the market welcomed a cautious tone from administration officials on government-sponsored enterprise (GSE) reform. Asset-backed securities slightly underperformed overall; however, larger auto and credit card sectors delivered positive excess returns for the month.