Last week, the Bureau of Labor Statistics reported a drop in the unemployment rate to 4.4% in December, down from 4.5% in November. However, nonfarm payroll employment levels crept up by 50,000 workers, which was less than the downwardly revised 56,000 in November and short of analyst estimates. Overall, it was a mixed report that supports the narrative of a low hire, low fire job market and is unlikely to inspire a rate cut at the FOMC meeting later this month. Although December’s employment data did little to provide the clarity the capital markets are seeking, it was also not sufficiently weak to warrant a rate cut. Currently, fed funds futures are pricing-in only a 5% change of the Fed cutting rates in January.
The markets responded to this news with Treasuries selling-off, largely around the policy sensitive 2-year tenor with Treasury yields largely unchanged past about 10-years. Conversely, ‘AAA’ municipal yields fell across the curve, with the largest declines concentrated in the first few years. The rally in munis was largely supply driven following a modest calendar at year-end and a bit of a slow start to the new year. However, weekend news of the US central bank being subpoenaed by the Justice Department with threats of criminal indictment have markets concerned about Fed independence. In addition, this week is a heavy week for economic data with December’s Consumer Price Index scheduled to be released on Tuesday and November’s Producer Price Index scheduled to be released on Wednesday. As markets digest these events there is heightened level of risk for rate volatility over the next few days. In addition, as shown below, ACM 10-year Treasury term premium are at about the highest levels seen in over a decade. This is an indication of some nervousness about future and provides bond investors with a reward for assuming duration.
Slopes along the municipal yield curve are steepest from 14 to 19-years, with over 80 bps of slope. Like the Treasury curve, the municipal yield curve also rewards investors for extending duration. Investors benefit from a steep roll-down over time as bonds mature. 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.
Insights and Strategy
Muni/Treasury ratios for 5-year and shorter maturities have seen significant declines over the past month due to a concentration of retail demand remains at the front end of the yield curve. However, this is a still an improvement from September, when ratios in the 1-year tenor dropped to as low as 56%. Ratios further out the curve, 20-years and longer, remain attractive due to weaker demand and wider spreads. For investors seeking to maximize curve positioning with relative value, extending to the 19-year part of the municipal yield curve provides over 90% of the 30-year maturity and over 80% of equivalent Treasury yields. In contrast to the rich belly of the curve, particularly from 5 to 10-years, we should start to see more pressure on the long-end as investors are tempted to extend duration by higher yields and relative value.
Municipal new issuance volume is expected to pick-up this week with over $11 billion in new issues on the calendar, up from approximately $7 billion last week. The New York City Transitional Finance Authority Future Tax Secured Revenue plans to sell $1.5 billion of bonds, Metropolitan Nashville Airport Authority is on the calendar with $1.28 billion, and California Community Choice Financing Authority is scheduled to offer $850 million. This past week, municipal bond mutual funds and ETF’s collectively benefitted from a little over $2 billion of inflows. Furthermore, last week was the fifth straight week that net flows topped $1 billion for municipal ETF’s. Given the strong fund flows and current relative values, this week’s larger calendar should face a receptive audience.
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.
January 12, 2026 | Timothy Iltz
Overview
Last week, the Bureau of Labor Statistics reported a drop in the unemployment rate to 4.4% in December, down from 4.5% in November. However, nonfarm payroll employment levels crept up by 50,000 workers, which was less than the downwardly revised 56,000 in November and short of analyst estimates. Overall, it was a mixed report that supports the narrative of a low hire, low fire job market and is unlikely to inspire a rate cut at the FOMC meeting later this month. Although December’s employment data did little to provide the clarity the capital markets are seeking, it was also not sufficiently weak to warrant a rate cut. Currently, fed funds futures are pricing-in only a 5% change of the Fed cutting rates in January.
The markets responded to this news with Treasuries selling-off, largely around the policy sensitive 2-year tenor with Treasury yields largely unchanged past about 10-years. Conversely, ‘AAA’ municipal yields fell across the curve, with the largest declines concentrated in the first few years. The rally in munis was largely supply driven following a modest calendar at year-end and a bit of a slow start to the new year. However, weekend news of the US central bank being subpoenaed by the Justice Department with threats of criminal indictment have markets concerned about Fed independence. In addition, this week is a heavy week for economic data with December’s Consumer Price Index scheduled to be released on Tuesday and November’s Producer Price Index scheduled to be released on Wednesday. As markets digest these events there is heightened level of risk for rate volatility over the next few days. In addition, as shown below, ACM 10-year Treasury term premium are at about the highest levels seen in over a decade. This is an indication of some nervousness about future and provides bond investors with a reward for assuming duration.
Slopes along the municipal yield curve are steepest from 14 to 19-years, with over 80 bps of slope. Like the Treasury curve, the municipal yield curve also rewards investors for extending duration. Investors benefit from a steep roll-down over time as bonds mature. 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.
Insights and Strategy
Muni/Treasury ratios for 5-year and shorter maturities have seen significant declines over the past month due to a concentration of retail demand remains at the front end of the yield curve. However, this is a still an improvement from September, when ratios in the 1-year tenor dropped to as low as 56%. Ratios further out the curve, 20-years and longer, remain attractive due to weaker demand and wider spreads. For investors seeking to maximize curve positioning with relative value, extending to the 19-year part of the municipal yield curve provides over 90% of the 30-year maturity and over 80% of equivalent Treasury yields. In contrast to the rich belly of the curve, particularly from 5 to 10-years, we should start to see more pressure on the long-end as investors are tempted to extend duration by higher yields and relative value.
Municipal new issuance volume is expected to pick-up this week with over $11 billion in new issues on the calendar, up from approximately $7 billion last week. The New York City Transitional Finance Authority Future Tax Secured Revenue plans to sell $1.5 billion of bonds, Metropolitan Nashville Airport Authority is on the calendar with $1.28 billion, and California Community Choice Financing Authority is scheduled to offer $850 million. This past week, municipal bond mutual funds and ETF’s collectively benefitted from a little over $2 billion of inflows. Furthermore, last week was the fifth straight week that net flows topped $1 billion for municipal ETF’s. Given the strong fund flows and current relative values, this week’s larger calendar should face a receptive audience.
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.