Last week, the Fed held its final meeting of 2025, with officials voting to cut its policy interest rate by a quarter-point for a third consecutive meeting. A lack of economic data, stemming from the longest-ever government closure, combined with a weakening labor market and lingering inflation has led to policy uncertainty. As a result, the Fed’s decision was not unanimous, with two regional Fed bank presidents voting to hold rates steady with one Fed governor voting for a half-point cut and nine members voting for a quarter-point cut. The market’s response to the decision has been relatively muted, with Treasuries rallying six to nine-basis points on the short-end of the curve and selling-off around four basis points on the long-end while munis were largely unchanged out to around 10-years and selling-off around two basis points on the long-end.
The markets continue to be responsive to comments from the Fed. The prospect of additional rate cuts next year supports lower short-term Treasury yields, while long-maturity tenors are supported by elevated inflation expectations. However, on the long-end, rate cuts into a relatively strong economy have the potential to ignite inflation to the detriment of long-duration assets. As shown in the graph below, slopes for municipals from both two to ten-years and from ten to twenty-years have steepened significantly in recent months relative to Treasuries.
Insights and Strategy
Slopes along the municipal yield curve are currently steepest around the 16-year tenor, with over 100 bps in slope from 10 to 19-years. As a result, the municipal yield curve currently rewards investors for extending from the 10-year range to the 15-20-year range. Investors also 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.
Muni/Treasury ratios generally dropped over the past week. However, the biggest moves were around the 1-year maturity where ratios actually increased to just above 70%. This move was not a surprise since the extreme short-end of the curve is where the Fed exerts its greatest influence. However, this is a remarkable change from September, when ratios in this tenor dropped to as low as 56%. Nevertheless, for investors seeking to maximize curve positioning with relative value, extending to the 19-year part of the municipal yield curve provides 90% of the 30-year municipal maturity and 80% of equivalent Treasury yields.
This week, there is a busy economic calendar with the November jobs report along with an estimate of October payrolls due on Tuesday and the consumer price index scheduled for release on Thursday. Although bond traders are betting the Fed cuts rates twice next year, the Fed’s “dot plot” is currently indicating just one reduction in 2026. Therefore, we could see some volatility this week in response to the new data due to the mis-match of expectations. The markets are likely to embrace softer labor data as an indication of a more-dovish Fed. In addition, there is a seasonal push for borrowers to complete transactions before year-end. This week, the municipal bond market is expected to offer more than $6 billion in new issues. Notable deals this week include: New York Transitional Finance Authority with $2 billion and Ohio State University with $562 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.
December 15, 2025 | Timothy Iltz
Overview
Last week, the Fed held its final meeting of 2025, with officials voting to cut its policy interest rate by a quarter-point for a third consecutive meeting. A lack of economic data, stemming from the longest-ever government closure, combined with a weakening labor market and lingering inflation has led to policy uncertainty. As a result, the Fed’s decision was not unanimous, with two regional Fed bank presidents voting to hold rates steady with one Fed governor voting for a half-point cut and nine members voting for a quarter-point cut. The market’s response to the decision has been relatively muted, with Treasuries rallying six to nine-basis points on the short-end of the curve and selling-off around four basis points on the long-end while munis were largely unchanged out to around 10-years and selling-off around two basis points on the long-end.
The markets continue to be responsive to comments from the Fed. The prospect of additional rate cuts next year supports lower short-term Treasury yields, while long-maturity tenors are supported by elevated inflation expectations. However, on the long-end, rate cuts into a relatively strong economy have the potential to ignite inflation to the detriment of long-duration assets. As shown in the graph below, slopes for municipals from both two to ten-years and from ten to twenty-years have steepened significantly in recent months relative to Treasuries.
Insights and Strategy
Slopes along the municipal yield curve are currently steepest around the 16-year tenor, with over 100 bps in slope from 10 to 19-years. As a result, the municipal yield curve currently rewards investors for extending from the 10-year range to the 15-20-year range. Investors also 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.
Muni/Treasury ratios generally dropped over the past week. However, the biggest moves were around the 1-year maturity where ratios actually increased to just above 70%. This move was not a surprise since the extreme short-end of the curve is where the Fed exerts its greatest influence. However, this is a remarkable change from September, when ratios in this tenor dropped to as low as 56%. Nevertheless, for investors seeking to maximize curve positioning with relative value, extending to the 19-year part of the municipal yield curve provides 90% of the 30-year municipal maturity and 80% of equivalent Treasury yields.
This week, there is a busy economic calendar with the November jobs report along with an estimate of October payrolls due on Tuesday and the consumer price index scheduled for release on Thursday. Although bond traders are betting the Fed cuts rates twice next year, the Fed’s “dot plot” is currently indicating just one reduction in 2026. Therefore, we could see some volatility this week in response to the new data due to the mis-match of expectations. The markets are likely to embrace softer labor data as an indication of a more-dovish Fed. In addition, there is a seasonal push for borrowers to complete transactions before year-end. This week, the municipal bond market is expected to offer more than $6 billion in new issues. Notable deals this week include: New York Transitional Finance Authority with $2 billion and Ohio State University with $562 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.