Last week, the capital markets were focused on the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyoming. The markets were seeking clarity on the Fed’s economic outlook and looking for clues about its strategy to bring inflation back to target. Although Chairman Warsh did not reveal much, he did reiterate that curbing inflation is the central bank’s top priority and that inflation is not slowing meaningfully. Chairman Warsh also described interest rates as the Fed’s “predominant tool” for controlling inflation. These comments were received by the markets as hawkish and have prompted increased bets on a September rate hike. This morning, Fed funds futures are now pricing in the likelihood of a Fed rate hike of 25bp at over 90% by the October 27-28 meeting. To compound matters, renewed aggression in Iran is placing upward pressure on oil prices leading to further speculation about inflation.
Implied Overnight Rate & Number of Hikes/Cuts
Insights and Strategy
Over this past month, the Treasury curve is largely unchanged, flattened slightly with one-month yields increasing approximately 7 bps and 30-year yields dropping approximately three bps. Muni yields, however, have moved in the opposite direction with a steepening yield curve as long yields sold-off approximately ten basis points and three-month yields rallied a little over four bps. The muni curve rotated around the ten-year tenor with maturities past ten years selling-off and and maturities shorter than ten years rallying. The largest moves in municipals were in the 15-20-year tenors with yields increasing roughly 15bps as heavy issuance, economic uncertainty and inflation fears placed upward pressure on longer yields. Despite these concerns, the slope at the long-end of the municipal yield curve, past 20-years, remains relatively flat with a total slope of 29 bps from 21-30-years. Due to this flat tail, municipal bond investors can currently buy 20-year maturities that yield 91% of the 30-year curve versus 73% for 10-year maturities.
Municipal/Treasury ratios generally increased (cheaper) for maturities past 5-years this past week, with the largest changes occurring past the 20-year tenor. One-year ratios have again dipped below 60%, 10-year ratios tipped over 70% of Treasuries and, due to significant cheapening last week, 20-year ratios are again over 80%. Investors seeking to maximize curve positioning with relative value can now go to the 14-year tenor and capture almost 85% of the 30-year municipal curve with less than half the maturity extension. However, ratios in this part of the curve continue to be a challenge at close to 70% of Treasuries. Flattening further out the curve has made extending maturities less rewarding, but ratios are cheaper with investors capturing over 87% of Treasuries at 30-years. Although, the yield curve is very flat over these longer tenors with just two to three basis points of slope for maturities past 23-years.
The Municipal the new issue calendar picks-up this week from $12.9 billion last week to $15.8 billion. Notable deals include: State of New York Sales Tax Revenue Bonds with $1.93 billion, Salt River Project Agricultural Improvement & Power District has scheduled $1.35 billion, Chicago O’Hare International Airport is expected to offer $1.31 billion and Texas Transportation Commission has $1.12 billion on the calendar. Last week, investors added approximately $1.4 billion to municipal bond mutual funds, up from $838 million the prior week, according to LSEG Lipper data. Furthermore, redemptions and maturities in the next 30-days are expected to total $20.1 billion, according to data compiled by Bloomberg.
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 31, 2026 | Timothy Iltz
Overview
Last week, the capital markets were focused on the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyoming. The markets were seeking clarity on the Fed’s economic outlook and looking for clues about its strategy to bring inflation back to target. Although Chairman Warsh did not reveal much, he did reiterate that curbing inflation is the central bank’s top priority and that inflation is not slowing meaningfully. Chairman Warsh also described interest rates as the Fed’s “predominant tool” for controlling inflation. These comments were received by the markets as hawkish and have prompted increased bets on a September rate hike. This morning, Fed funds futures are now pricing in the likelihood of a Fed rate hike of 25bp at over 90% by the October 27-28 meeting. To compound matters, renewed aggression in Iran is placing upward pressure on oil prices leading to further speculation about inflation.
Implied Overnight Rate & Number of Hikes/Cuts
Insights and Strategy
Over this past month, the Treasury curve is largely unchanged, flattened slightly with one-month yields increasing approximately 7 bps and 30-year yields dropping approximately three bps. Muni yields, however, have moved in the opposite direction with a steepening yield curve as long yields sold-off approximately ten basis points and three-month yields rallied a little over four bps. The muni curve rotated around the ten-year tenor with maturities past ten years selling-off and and maturities shorter than ten years rallying. The largest moves in municipals were in the 15-20-year tenors with yields increasing roughly 15bps as heavy issuance, economic uncertainty and inflation fears placed upward pressure on longer yields. Despite these concerns, the slope at the long-end of the municipal yield curve, past 20-years, remains relatively flat with a total slope of 29 bps from 21-30-years. Due to this flat tail, municipal bond investors can currently buy 20-year maturities that yield 91% of the 30-year curve versus 73% for 10-year maturities.
Municipal/Treasury ratios generally increased (cheaper) for maturities past 5-years this past week, with the largest changes occurring past the 20-year tenor. One-year ratios have again dipped below 60%, 10-year ratios tipped over 70% of Treasuries and, due to significant cheapening last week, 20-year ratios are again over 80%. Investors seeking to maximize curve positioning with relative value can now go to the 14-year tenor and capture almost 85% of the 30-year municipal curve with less than half the maturity extension. However, ratios in this part of the curve continue to be a challenge at close to 70% of Treasuries. Flattening further out the curve has made extending maturities less rewarding, but ratios are cheaper with investors capturing over 87% of Treasuries at 30-years. Although, the yield curve is very flat over these longer tenors with just two to three basis points of slope for maturities past 23-years.
The Municipal the new issue calendar picks-up this week from $12.9 billion last week to $15.8 billion. Notable deals include: State of New York Sales Tax Revenue Bonds with $1.93 billion, Salt River Project Agricultural Improvement & Power District has scheduled $1.35 billion, Chicago O’Hare International Airport is expected to offer $1.31 billion and Texas Transportation Commission has $1.12 billion on the calendar. Last week, investors added approximately $1.4 billion to municipal bond mutual funds, up from $838 million the prior week, according to LSEG Lipper data. Furthermore, redemptions and maturities in the next 30-days are expected to total $20.1 billion, according to data compiled by Bloomberg.
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.