The municipal yield curve steepened over the past week with a rally in the muni market driving yields down across the curve amid aggressive bidding on the short-end in anticipation of a September Fed rate cut. Inquiries on the trade desk continue to be concentrated within 10-years and maturities under 5-years are pricing at notably tight levels. Treasuries, in contrast, flattened over the past week with the market selling-off from 6-months to 30-years with yields rising with greater consequence on the short-end than the long-end. The August 1st Bureau of Labor Statistics nonfarm payrolls report continues to weigh on the markets with traders focusing on softer payrolls data as justification for the Fed to cut rates at its next meeting. In addition, the nomination of Council of Economic Advisers Chairman Stephen Miran to serve out the final few months of Adriana Kugler’s seat following her surprise resignation last week has been viewed by the markets as a potentially dovish development.
Today, the municipal yield curve continues to price to richer levels with bumps on the short-end as the long-end remains relatively cheap. Curve slopes in the more intermediate range continue to steepen with muni 2s10s continuing to steepen as the flattening treasury curve and steepening muni curve diverge. Recent movements highlight the uncorrelated nature of the two asset classes as a benefit of adding munis to fixed income portfolios. Investors seeking optimal placement in the intermediate portion of the yield curve will be lured out to the 11-13-year tenor with relatively appealing yields and steep slopes versus longer maturities. Currently the municipal curve has 80bps of slope from 8-13 years with the 13-year maturity yielding 80% of the 30-year curve. Extending an additional 7-years to the 20-year maturity brings yields to 95% of the 30-year curve. However, past this point marginal yields diminish to just 1- basis point per year for the last several years.
Insights and Strategy
Although long-term ratios remain appealing, the yield differentials between municipals and Treasuries have richened over the past week. Muni/Treasury ratios at the short-end of the curve continue to compress in anticipation of a September rate cut. Currently, percentages are now well into to 50’s, which is a level that mainly appeals to individual investors in the top tax brackets. Although the markets have priced-in a September rate cut, the Fed has not been shy about concerns regarding tariff fueled inflation and sees its current policy stance as an appropriate guard against inflation. However, ratios on the long-end remain relatively cheap with 20-year ratios in the 90’s. Although risks and rewards need to carefully evaluated, the municipal yield curve is currently rewarding extension.
Last week, long-term municipal issue volumes hit $21.7 billion, which is the biggest weekly total since 2017, while steady inflows and a supportive interest-rate backdrop drove a modest rally. LSEG Lipper Global Fund Flows reported that over $2.6 billion have been added to municipal bond mutual funds over the last 2-weeks. This week municipal bond issuance is expected to be less than half of last week at $10.4 billion with $1.14 billion expected to be sold by the Port Authority of New York & New Jersey and $750 million from Long Island Power Authority. In addition, this week’s CPI data is facing heightened scrutiny by market participants following the removal of the US Bureau of Labor Statistics Commissioner earlier this month. This week’s CPI could prove pivotal amid anticipation that CPI shows inflation moving further away from the Fed’s 2% target.
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.
August 11, 2025 | Timothy Iltz
Overview
The municipal yield curve steepened over the past week with a rally in the muni market driving yields down across the curve amid aggressive bidding on the short-end in anticipation of a September Fed rate cut. Inquiries on the trade desk continue to be concentrated within 10-years and maturities under 5-years are pricing at notably tight levels. Treasuries, in contrast, flattened over the past week with the market selling-off from 6-months to 30-years with yields rising with greater consequence on the short-end than the long-end. The August 1st Bureau of Labor Statistics nonfarm payrolls report continues to weigh on the markets with traders focusing on softer payrolls data as justification for the Fed to cut rates at its next meeting. In addition, the nomination of Council of Economic Advisers Chairman Stephen Miran to serve out the final few months of Adriana Kugler’s seat following her surprise resignation last week has been viewed by the markets as a potentially dovish development.
Today, the municipal yield curve continues to price to richer levels with bumps on the short-end as the long-end remains relatively cheap. Curve slopes in the more intermediate range continue to steepen with muni 2s10s continuing to steepen as the flattening treasury curve and steepening muni curve diverge. Recent movements highlight the uncorrelated nature of the two asset classes as a benefit of adding munis to fixed income portfolios. Investors seeking optimal placement in the intermediate portion of the yield curve will be lured out to the 11-13-year tenor with relatively appealing yields and steep slopes versus longer maturities. Currently the municipal curve has 80bps of slope from 8-13 years with the 13-year maturity yielding 80% of the 30-year curve. Extending an additional 7-years to the 20-year maturity brings yields to 95% of the 30-year curve. However, past this point marginal yields diminish to just 1- basis point per year for the last several years.
Insights and Strategy
Although long-term ratios remain appealing, the yield differentials between municipals and Treasuries have richened over the past week. Muni/Treasury ratios at the short-end of the curve continue to compress in anticipation of a September rate cut. Currently, percentages are now well into to 50’s, which is a level that mainly appeals to individual investors in the top tax brackets. Although the markets have priced-in a September rate cut, the Fed has not been shy about concerns regarding tariff fueled inflation and sees its current policy stance as an appropriate guard against inflation. However, ratios on the long-end remain relatively cheap with 20-year ratios in the 90’s. Although risks and rewards need to carefully evaluated, the municipal yield curve is currently rewarding extension.
Last week, long-term municipal issue volumes hit $21.7 billion, which is the biggest weekly total since 2017, while steady inflows and a supportive interest-rate backdrop drove a modest rally. LSEG Lipper Global Fund Flows reported that over $2.6 billion have been added to municipal bond mutual funds over the last 2-weeks. This week municipal bond issuance is expected to be less than half of last week at $10.4 billion with $1.14 billion expected to be sold by the Port Authority of New York & New Jersey and $750 million from Long Island Power Authority. In addition, this week’s CPI data is facing heightened scrutiny by market participants following the removal of the US Bureau of Labor Statistics Commissioner earlier this month. This week’s CPI could prove pivotal amid anticipation that CPI shows inflation moving further away from the Fed’s 2% target.
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.