Tax Receipts/US Labor Market, Corporate Bond Spreads

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Tax Receipts/US Labor Market, Corporate Bond Spreads

Two items today:

#1: Using the US Daily Treasury Statement’s (DTS) data on “Withheld Income and Employment Taxes” to assess the US labor market in April 2020. The benefit to this approach is that it is real-time information. Employers’ payroll companies deposit workers’ income tax and withholding within a day or two of payroll dates. Higher payments historically correlate with higher employment, and the reverse is also true.

Yes, we will get some color on the US employment situation with this Friday’s Jobs Report, but it will already be 3 weeks out of date. The tax receipt/withholding data is current through month-end April.

Here’s how we are thinking about this data and what it says:

  • Baseline: we know that 30 million Americans have filed for unemployment insurance in the last 6 weeks, 19% of the workforce.
  • The April 30th 2020 DTS shows Treasury receiving $182.6 billion in “Withheld Income and Employment Taxes”. This is:

    14.6% lower than April 2019
    16.3% lower than January – April 2019
  • There are 2 important wrinkles to this math:

    First, the CARES Act allows employers to delay making their Social Security payments (6.2% of wages) through the rest of 2020 and those contributions (or lack thereof) are in this dataset. Since the CARES Act only passed on March 27th we suspect April was too soon to see its effects in terms of payments to Treasury.

    Second, unemployment payments typically include 10% Federal income tax withholding. These payments are also in the April DTS data to the degree those who have filed are already receiving UI checks.

Takeaway: in aggregate, this data shows that lower-paid workers are seeing the brunt of the economic damage from the COVID Crisis. Tax receipts are down by 15-16%, but 19% (and maybe more) of the workforce has been laid off. This is essentially a preview of what we will certainly see in this Friday’s jobs report: unemployment will be much higher for workers with less formal education who work in jobs that require either social interaction (e.g. hospitality) or working in close proximity with others (e.g. manufacturing).

#2: An update on the US corporate bond market; here is the latest data for Investment Grade (IG), BBB, and High Yield (HY) spreads over Treasuries:

Investment grade spreads over the last year (daily):

BBB spreads over the last year (daily):

High yield spreads over the last year (daily):

Four points on these charts:

Access to credit is as important as the cost of credit. As much as spreads across the credit spectrum have not returned to anything close to their pre-COVID levels, the corporate bond market remains open to new issuance. Boeing’s $25 billion deal last week shows that well enough.

Is the Fed actually in the market? It is not clear if the Federal Reserve is buying corporate bonds through its special purpose vehicles yet. On Friday Jeff Gundlach tweeted that he has heard they are not. No one asked Chair Powell about this during Wednesday’s press conference, so there is an information vacuum on this point.

Investment grade strengthened more than high yield last week. Investment grade spreads did tighten late last week (visible in the first and second charts) to new post March 23rd lows, but high yield spreads did not.

Worth remembering: there’s a big difference between the sector weightings of investment grade and high yield bond indices. IG is 25% Banks; this is why the Fed so quickly stepped into this market in March. HY’s largest weighting is Communications (24%). Energy is basically the same weight in both: 8-9%.

A quick thought before we wrap up: Gundlach said last week that investment grade corporates “looks to be about the most overvalued asset in the bond market.” He is no doubt looking at the long run history of spreads when he says that. At 217 basis points today, they are tighter than the Q4 2011 Greek debt crisis (222 to 266 bp) or the run up to Gulf War II (September/October 2002, 237 – 246 bp). And, of course, there is simply no comparison to the +400 bp spreads during the Financial Crisis.

Here is that long run chart of IG spreads as a further reference:

Takeaway from all this: corporate bonds are the hardest part of the capital market to read just now. The spillover of this opacity into equity markets is concentrated in small caps, as they trade in sympathy with high yield spreads. We continue to prefer large caps, as they are less beholden to the whims of the corporate credit market.

Sources:
Daily Treasury Statement: https://fsapps.fiscal.treasury.gov/dts/issues/collapsed