Overview
This past week, the Treasury curve shifted up eight to nine basis points in a parallel fashion from two years out while municipal yields remain essentially unchanged with the long end only about a basis point higher. The result is a steeper Treasury curve with municipal bonds generally outperforming Treasuries. Perhaps the most meaningful developments occurred in Treasuries on the extreme short-end with one-month and two-month yields rallying 10 to 20 basis points in anticipation of a Fed rate cut this week. However, following last Friday’s release of the delayed core personal consumption expenditures price index form the Bureau of Economic Analysis, inflation concerns were reinforced with prices up 0.2% from August and 2.8% from the prior year. As a result, the rate cut expected at the Fed’s final 2025 meeting later this week could potentially accelerate inflation concerns on the long-end.
Moreover, the balance of the year has the potential to be more dynamic than previous years for the fixed income markets. As a result of the shutdown, the traditional data-release schedules have been pushed-back this year. November payroll data will not be published until next Tuesday on December 16, November’s CPI is scheduled for release two days later on December 18 and third quarter GDP is scheduled to be released just two days before Christmas. In addition, the Supreme Court could release their decision on the IEEPA tariff case later this month.
Insights and Strategy
Slopes along the municipal yield curve continue to be steepest around the 16-year tenor, with over 100 bps in slope from 10 to 19-years. This is a significant change from earlier last month, when the steepest slopes were around the 10-year tenor. This shift has increased the reward to investors for extending from the 10-year range to the 15-20-year range. In addition, investors benefit from a steep roll-down over time. Although the municipal yield curve is currently rewarding duration, investors should be cautious when extending to maturities past 20-years, where the long-end becomes very flat. As a result of this flat tail, municipal bond investors can buy maturities under 20-years that yield over 90% of the 30-year curve.
Elevated municipal tax-equivalent yields on the long-end continue to reward investors, although not by as much as they did last week. Muni/Treasury ratios have generally dropped a bit over the past week, with the biggest moves around the 10-year maturity where ratios have declined 1.5% to 66.91%. Ratios of this level are historically rich and primarily appeal to individuals investors in the top tax brackets. Not surprisingly, over the past month, the biggest moves have been on the extreme short-end of the curve where the Fed exerts its greatest influence. One-year ratios are now 1.27% richer as ratios have dropped to 68.70%. For investors seeking to maximize curve positioning with relative value, extending to the 18-year part of the municipal yield curve provides 88% of the 30-year maturity and 77.5% of equivalent Treasury yields.
This week, the municipal bond market is expected to offer more than $10 billion in new issues following a $15 billion calendar last week. Notable deals this week include: $2 billion Regents of the University of California Revenue Bonds, $1 billion Chicago O’Hare International Airport and New York Housing Development Corp. with $753 million. Fund flows have generally been supportive over the past month. LSEG Lipper Global Fund Flows reported that intermediate-maturity municipal bond funds saw inflows of $133 million last week while high-yield municipal bond funds experienced inflows of about $253 million and long-term muni funds saw inflows of about $320 million.
Herbert J. Sims & Co. Inc. is a SEC registered broker-dealer, a member of FINRA, SIPC. The information contained herein has been prepared based upon publicly available sources believed to be reliable; however, HJ Sims does not warrant its completeness or accuracy and no independent verification has been made as to its accuracy or completeness. The information contained has been prepared and is distributed solely for informational purposes and is not a solicitation or an offer to buy or sell any security or instrument or to participate in any trading or investment strategy, and is subject to change without notice. All investments include risks. Nothing in this message or report constitutes or should be construed to be accounting, tax, investment or legal advice.