Knowledge

Acquired

MONTHLY MARKET COMMENTS

• Volatility in rates markets has been one of the themes during 2023 and April was no different. While the magnitude of volatility was perhaps muted, the curve inversion increased between the 3-month and 2-year nodes while yields compressed between 2's and 10-year points. We believe the outlook for rates has been influenced by expectations of both continued Fed tightening and banking sector friction coupled with concerns of the pending debt ceiling discussions and potential to use the ceiling as a point of political leverage. The US economy continued to remain resilient with a strong labor market, but we have seen signs of weakening in claims data as well as a number of leading indicators that still point toward recession. Global growth, as estimated by the IMF, was modestly reduced to 2.8% for 2023 as a function of elevated downside risks contributed by persistent financial stress.

• Corporate spreads similarly witnessed volatility during the month of April, yet the index spread ended the month at approximately 136 bps, but 1 bp tighter over the month. This benign change during the month belied the concerns that remained in the regional banking sector following Moodys' downgrade in April of 11 regional issuers and the most recent stress in First Republic. Despite the heightened sensitivity to the regional bank sector, corporate fundamentals were trending down as companies lost pricing power, but from a point of strength. The earnings season has not been as bad as anticipated with aggregate earnings down approximately -1.7% versus consensus of -7%. Despite this point of strength, we believe high labor costs coupled with a Fed focused on driving prices lower will likely pressure profits, impacting margins which should lead to wider spreads.

• The exempt municipal market experienced an increase in supply during the month of Apri,l yet remained below issuance levels from a year ago through April. As a function of supply, valuations corrected across the curve but was most pronounced in the short end as the 1-year municipal-to-treasury ratio increased from 53.5% to 62% and the 5-year ratio increased over 5%. We believe the market will further need to digest the expectation that the SVB and Signature Bank municipal portfolios will be liquidated during the first few weeks of May which will introduce more supply into the market.