Curve Commentary: September 29, 2025

Overview

With government funding set to expire Tuesday, the shadow of a potential government shutdown continues to loom over the bond market bringing yields down across the Treasury curve.  In addition, the shutdown threatens to delay the release of key economic data, including Friday’s nonfarm payroll employment data and unemployment rate from the Bureau of Labor Statistics.  This data is critical to current rate forecasts as weakening employment data was an influential factor in the Fed’s decision to cut rates earlier this month.  The Fed has recently commented that labor demand, and the recent pace of job creation, appear to be running below the “breakeven” rate needed to maintain current unemployment levels.  The Fed funds futures market is currently indicating an 88.7% chance of a 25bps rate cut at its October 29 meeting.

Last week, Treasuries were largely unchanged with the threat of a government shutdown drawing a haven bid while the front-end of the muni curve experienced the majority of the movement.  Muni yields in this part of the curve have become quite rich with muni/Treasury ratios in the 50’s for one to five years.  At these levels, yields are only narrowly appealing even to individual investors in the top tax brackets.  Following last week’s moves, ratios popped-up to the low to mid-60’s on the front-end of the muni curve with significant pressure from institutional investors positioning portfolios ahead of the quarter-end.  

Insights and Strategy

Although the muni curve remains steeper than the Treasury curve, last week’s sell-off resulted in considerable flattening for munis maturing within 10-years.  Over the past 2-months we have experienced significant compression of spread relationships in this portion of the curve.  However, it is notable that the steepest portion of the municipal yield curve is currently the 9 to 11-year stretch with a slope of 46 bps.  Although the municipal yield curve remains positively sloped, investors should exercise caution to manage duration risk by buying bonds where the yield curve has sufficient slope to reward risk.

Nevertheless, long munis continue to provide compelling relative value with 20-year munis yielding almost 85% of Treasuries and 30-year munis yielding almost 90% of Treasuries.  Even the 12-year tenor, which is less than half of the 30-year curve, is yielding 75% of the 30-year maturity, making this an appealing place to position new purchases.  Past 20-years, the slope tapers significantly to just a basis point or two per year.  For investors with longer mandates, I would consider buying shorter in the 12 to 17-year range and wait to see if the long-end steepens before extending.  

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.

2025 LeadingAge CT Annual Conference

HJ Sims is proud to be attending the 2025 LeadingAge CT Annual Conference.

William Sims, Managing Principal, HJ Sims, has been selected to receive the 2025 LeadingAge Connecticut Trustee of the Year Award, a prestigious award to a member organization trustee who has demonstrated excellence in governance practice and dedication to the not-for-profit mission.

The award presentation will take place at LeadingAge Connecticut’s Annual Meeting to be held from 3:30 p.m. to 7:00 p.m. on October 14, 2025 at the Aqua Turb Club in Plantsville.

Attending:

William Sims, Andrew Nesi

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Curve Commentary: September 15, 2025

Overview

Attentions are focused on the Fed this week with their rate decision scheduled to be announced on Wednesday.  Traders are positioning ahead of Wednesday’s meeting with Fed funds futures continuing to demonstrate conviction of a 25 bps cut.  However, inflation has been creeping higher in recent months and is keeping the Fed cautious.  Last week, the Consumer Price Index for All Urban Consumers increased 0.4% on a seasonally adjusted basis for August after rising 0.2% in July.  The all-items index rose 2.9 percent for the 12-month period ending August, which is significantly above the Fed’s 2% inflation target.  However, many traders are arguing that weaker jobs data outweighs concerns of higher prices.  Last week the Bureau of Labor Statistics reported the U.S. labor market added 911,000 fewer jobs than previously reported, which many in the bond market are interpreting as additional justification for the Fed to cut rates later this week.

Not surprisingly, both the Treasury market and the muni market rallied last week as investors rush to maximize yields ahead of the anticipated Fed rate cut.  Treasury yields are now about 4.5 basis points lower on the long-end while munis experienced more meaningful moves with long munis now about 15.5 basis points lower than at the start of last week.  These moves have resulted in muni/Treasury ratios grinding lower with the largest adjustments around the 10-year tenor and a weekly change of over 4% in this range.  Nevertheless, long munis continue to provide compelling relative value with 20-year munis yielding almost 87% of Treasuries and 30-year munis yielding over 90% of Treasuries.  

Insights and Strategy

From a strategy perspective, caution is warranted where risk is not rewarded.  Investors should exercise caution when extending duration to avoid those parts of the yield curve where extension is not rewarded with additional yield.  Tenors past 20-years, particularly in the high-yield sectors, should be approached with caution around the inflection points where yield tapers-off, particularly around the 20-Year mark.  Currently, the steepest slopes along the muni curve are from 5 to 7-years and from 8 to 12 years, where investors can expect to pick-up approximately 17 basis points for each year they extend.  Munis in the 20-year tenor are yielding 95% of the 30-year curve, making this a very appealing place to position new purchases.  Even the 12-year tenor, less than half of the 30-year curve, is yielding 75% of the 30-year maturity.  Past 20-years, the slope tapers significantly to just a basis point or two per year.  For investors with longer mandates, I would consider buying shorter in the 15 to 20-year range and wait until the long-end steepens to extend.  

Travelling down the credit ladder, lower rated munis experienced even larger moves with 10-12 year and 25-30-year ‘BBB’ rated hospital bonds rallying 25 bps.  These moves have lead to credit spreads compressing and the yield curve flattening on the long-end as investors squeeze out the remaining marginal yield with ‘AAA’ munis yielding an almost ruler flat 80% of ‘BBB’ hospitals past 20-years.  This part of the market has historically been very sensitive to liquidity and changing sentiment.  However, performance in the high yield space has been inconsistent with ‘BB/B’ –‘BBB’ spreads widening while ‘non-rated’-‘BB/B’ credit spreads compressed.

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.

Curve Commentary: September 9, 2025

Overview

Over the past week, both municipal bonds and Treasuries have experienced a meaningful rally which shifted rates lower as sentiment intensifies in anticipation of a Fed rate cut.  Momentum picked-up as the week progressed, with 10-year Treasury yields charging through key support levels on Thursday and Friday.  Ultimately, the largest moves happened on Friday following the release of nonfarm payrolls by the Bureau of Labor Statistics which contributed to bumps in the municipal yield curve ranging from 2 bps in 2026 to 12 bps in 2055.  Prior to the data release, economists surveyed by Dow Jones were anticipating payrolls would rise by 75,000 jobs in August versus the actual survey report of only 22,000 jobs.  In addition to a disappointment versus the survey, this is a significant slowdown from July’s 79,000 job increase.  While the labor market is showing meaningful signs of cooling, unemployment remains at a historically healthy 4.3% and total non-farm payroll continues to set new monthly records.  This morning, the Fed funds futures market is pricing-in a 112% chance of a 25 bps cut at next week’s meeting.

Although the Fed only sets the overnight lending rate, we are seeing the majority of the movement at the long-end of the curve as investors lock-in long rates.  The biggest weekly moves in Treasuries over the past week were in maturities past 15-years, where the market rallied from 20 to 22 bps.  Munis largely echoed Treasuries with yields dropping a fairly steady 15 bps past 15-years with more muted moves on the short-end.  

Insights and Strategy

Following last week’s moves, muni/Treasury ratios are generally slightly less compelling.  Although ratios have improved significantly in the 1-year tenor at 60%, this remains rich to the 10-year mean of 94.78%.  Progressing out the yield curve produces increasingly appealing ratios with 30-year ratios at 92.68% versus a 10-year mean of 93.92%.  From a strategy perspective, this remains a good time to extend portfolio durations and take advantage of the additional yield offered by longer maturities.  However, caution is warranted as the slope tapers-off significantly after 20-years to just a basis point or two per year.  For investors with longer mandates, I would consider buying shorter in the 15 to 20-year range and wait until the long-end steepens to extend.  Investors around the 20-year tenor are collecting almost 90% of equivalent Treasury yields and 95% of the 30-year curve, making this a very appealing place to position new purchases.

Municipal issuance is expected to be approximately $9.5 billion this week.  The Atlanta Department of Aviation plans to sell a $1.03 billion issue and Black Belt Energy Gas District has a $925 million issue on the calendar.  With $20 billion in scheduled maturities and redemptions over the next 30-days and $672 million of municipal-bond fund inflows last week, this week’s new issues will likely continue to face a strong inquiry.  Recent inflows have favored long and high-yield strategies.

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.

Curve Commentary: August 25, 2025

Overview

Jerome Powell delivered his highly anticipated keynote address at the Jackson Hole Economic Policy Symposium last Friday.  Prior to the meeting, the bond market’s forecast of a 25 basis point cut at the Fed’s September 16-17 meeting had been diminishing, with Fed Funds Futures indicating the likelihood in the mid-70’s.  Although Powell’s comments were largely cautious, the markets have interpreted his comments as a dovish shift with the probability of a rate cut now pricing in the low 80’s.  Important takeaways from the speech include the conflicting position the Fed faces, amid mounting political pressures, with inflation pegged stubbornly above its 2% target and a languishing labor market.  Perhaps more importantly, and generally ignored by the media, Powell outlined a new framework to guide future Fed decisions.  The Fed’s revised framework is designed to evolve with changes in the structure of the economy and how the Fed interprets those changes.  To accomplish this objective, the language in the existing framework was revised to shift focus away from the effective lower bound and remove some of the communications challenges the Fed has faced in the past with regard to the labor market.

Although the anticipation leading up to the Jackson Hole speech was significant, Powell’s comments did not surprise the market and yields were largely unchanged.  Over the past week, the muni yield curve has steepened a bit further with a rally on the short-end and the Treasury curve has rallied a bit in continued anticipation of a rate cut next month.  However, yield adjustments on both curves were fairly modest, with the biggest moves between 15 and 20 years on the muni curve as the market sold-off around 6 bps in this range.

Insights and Strategy

The steepening of the municipal yield curve has become particularly pronounced in the 5 to 10-year range with around 100bps of slope.  This is a notable change from the beginning of the year when the muni curve had 24 bps of slope in this range.  By comparison, the Treasury curve only has around 55 bps of slope in this range with munis having almost double the slope.  From a strategy perspective, this is a good time to extend portfolio durations and take advantage of the additional yield offered by longer maturities.  However, caution is warranted as the slope tapers-off significantly after 20-years to just a basis point or two per year.  For investors with longer mandates, I would consider buying shorter in the 15 to 20-year range and wait until the long-end steepens to extend.  Investors around the 20-year tenor are collecting roughly 95% of the 30-year curve, making this a very appealing place to position new purchases.

Although the markets have priced-in a September rate cut, the Fed remains concerned about tariff fueled inflation and sees its current policy stance as an appropriate guard against inflation.  The yield differentials between municipals and Treasuries have cheapened a bit over this past week with Treasuries outperforming munis.   One-year ratios were the exception, with muni yields a bit richer in anticipation of a Fed rate cut in September.  Currently, levels are now solidly in the mid-50’s, which is a level that only narrowly appeals to individual investors in the top tax brackets.  Ratios on the long-end remain relatively cheap with 20-year ratios over 90%.

This week is anticipated to be relatively light in terms of municipal issuance with around $7.4 billion in new issues on the calendar.  The State of Illinois plans to sell a $1.78 billion general obligation bond and Bay Area Rapid Transit has a $929.8 million issue on the calendar.  With $22.4 billion in scheduled maturities and redemptions over the next 30-days and $2.5 billion of municipal-bond fund inflows last week, this week’s new issues will likely face a strong inquiry.  Recent inflows have favored long and high-yield strategies.

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.