Inflation comes into a closer focus today in the Treasury market with Fed Funds Futures now reflecting an 84% chance of the Fed cutting rates next month. This is down significantly from last week when the probability was over 100%. Last week, the credit markets continued to focus on the August 1st Bureau of Labor Statistics nonfarm payrolls report, which included a cumulative downward adjustment of 258,000 jobs and convinced capital markets that a September rate cut was certain. However, the release of last week’s Producer Price Index, which jumped 0.9% on the month, compared with the Dow Jones estimate for a 0.2% gain, has markets casting doubt. Although the jobs data was striking, last week’s PPI is the biggest monthly increase we have seen since June 2022 and has the markets re-calibrating expectations.
Insights and Strategy
The municipal yield curve steepened a little over the past week with long maturities trending higher and maturities within 5-years rallying a bit. Treasuries also steepened over this past week, with the market selling-off as much as 8.5bpps on the long-end. On the trade desk, we continue to see aggressive bidding on the short-end with buyers continuing to anticipate a September Fed rate cut. Investors seeking optimal placement in the intermediate portion of the yield curve will be lured out to the 10-12-year tenor with relatively steep slopes and appealing yields versus the long-end of the curve. Currently the municipal curve has 52bps of slope from 2033 to 2036 with the 2036-year maturity yielding 74% 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, going much past this point marginal yields diminish to just 1- basis point per year for the last several years.
Although long-term ratios remain appealing, the yield differentials between municipals and Treasuries have once again richened over the past week. Despite the PPI recent print, muni/ Treasury ratios at the short-end of the curve continue to compress in anticipation of a September rate cut. Currently, levels are now well into to 50’s, which is a level that narrowly appeals to individual investors in the top tax brackets. While 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. Ratios on the long-end remain relatively cheap with 20-year ratios approximately 90%.
Credit spreads have been widening in the lower investment grade and non-rated sectors. Although economic concerns are weighing on the lower end of the credit spectrum, recent issuance has included several notably large non-rated and low-rated deals satisfying inquiries. Last week Florida’s Brightline private railroad rolled-over $985 million of junior debt at a yield of 14.89%. Low ridership and lagging revenue projections lead to S&P dropping its rating for some of the bonds issued on behalf of Brightline two steps to ‘BB-‘ from ‘BB+’ and Fitch lowering the senior debt to ‘B’ from ‘BB+’ at the end of last month. Recent ‘Baa’ credit spreads have widened to over 200 basis points, a 50 bps increase from the beginning of the year, and the Bloomberg High Yield municipal bond index is over 270 basis points wider than ‘AAA’ equivalents, a 40bps increase from early April following Liberation Day.
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 18, 2025 | Timothy Iltz
Overview
Inflation comes into a closer focus today in the Treasury market with Fed Funds Futures now reflecting an 84% chance of the Fed cutting rates next month. This is down significantly from last week when the probability was over 100%. Last week, the credit markets continued to focus on the August 1st Bureau of Labor Statistics nonfarm payrolls report, which included a cumulative downward adjustment of 258,000 jobs and convinced capital markets that a September rate cut was certain. However, the release of last week’s Producer Price Index, which jumped 0.9% on the month, compared with the Dow Jones estimate for a 0.2% gain, has markets casting doubt. Although the jobs data was striking, last week’s PPI is the biggest monthly increase we have seen since June 2022 and has the markets re-calibrating expectations.
Insights and Strategy
The municipal yield curve steepened a little over the past week with long maturities trending higher and maturities within 5-years rallying a bit. Treasuries also steepened over this past week, with the market selling-off as much as 8.5bpps on the long-end. On the trade desk, we continue to see aggressive bidding on the short-end with buyers continuing to anticipate a September Fed rate cut. Investors seeking optimal placement in the intermediate portion of the yield curve will be lured out to the 10-12-year tenor with relatively steep slopes and appealing yields versus the long-end of the curve. Currently the municipal curve has 52bps of slope from 2033 to 2036 with the 2036-year maturity yielding 74% 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, going much past this point marginal yields diminish to just 1- basis point per year for the last several years.
Although long-term ratios remain appealing, the yield differentials between municipals and Treasuries have once again richened over the past week. Despite the PPI recent print, muni/ Treasury ratios at the short-end of the curve continue to compress in anticipation of a September rate cut. Currently, levels are now well into to 50’s, which is a level that narrowly appeals to individual investors in the top tax brackets. While 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. Ratios on the long-end remain relatively cheap with 20-year ratios approximately 90%.
Credit spreads have been widening in the lower investment grade and non-rated sectors. Although economic concerns are weighing on the lower end of the credit spectrum, recent issuance has included several notably large non-rated and low-rated deals satisfying inquiries. Last week Florida’s Brightline private railroad rolled-over $985 million of junior debt at a yield of 14.89%. Low ridership and lagging revenue projections lead to S&P dropping its rating for some of the bonds issued on behalf of Brightline two steps to ‘BB-‘ from ‘BB+’ and Fitch lowering the senior debt to ‘B’ from ‘BB+’ at the end of last month. Recent ‘Baa’ credit spreads have widened to over 200 basis points, a 50 bps increase from the beginning of the year, and the Bloomberg High Yield municipal bond index is over 270 basis points wider than ‘AAA’ equivalents, a 40bps increase from early April following Liberation Day.
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.