Treasuries outperformed munis during this past week, as both markets moved in opposite directions on the long-end. Although uncertainty remains high, comments from Fed governor Waller supporting a July rate cut have put downward pressure on Treasury rates while the muni market struggles with: weakening fund demand, heavy supply and growing secondary offerings, particularly for maturities beyond the 10-year tenor. Looking at inflation expectations via inflation swaps, the market’s concerns become increasingly evident with two-year inflation swaps now over 3%, which is a level we haven’t seen since early 2023. In addition, with potentially higher tariffs being implemented on August 1, inflation anxiety is likely to be a significant factor this week.
Over the past week, Treasury yields past 10-years have generally declined by approximately 5 basis points while shorter Treasury yields survived the week essentially unchanged, resulting in a flatter Treasury curve. The municipal yield curve, on the other hand, moved higher with continued strong issuance and diminishing institutional demand paving a path to higher yields by approximately 15 to 23 basis points for tenors past 10-years. Looking at the 2s10s spread, which is the difference between the 10-year yield and the 2-year yield as an indicator of the steepness of the yield curve, the municipal curve has recently reached the steepest slope in over 2-years. This is an invitation for bond investors to extend duration.
Strategy and Insights
Slopes along the municipal curve continue to steepen significantly past 5-years, with an overall slope of 92 basis points from 6 to 11-years. Although the 20-year portion of the curve remains appealing on a relative value basis, with yields at 90% of equivalent Treasuries and almost 95% of the entire 30-year municipal curve. However, past this point the yield curve discourages extension by flattening to just a basis point or two per year.
Muni/Treasury ratios have generally cheapened during this past week. Currently, 10-year munis are yielding over 75% of equivalent Treasuries and 30-year munis are yielding over 95% of equivalent Treasuries. Although ratios are rewarding extension out to the long-end of the yield curve, the slope of the curve flattens out significantly past 20-years which diminishes the reward to a traditional muni investors of duration extension.
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.
July 21, 2025 | Timothy Iltz
Overview
Treasuries outperformed munis during this past week, as both markets moved in opposite directions on the long-end. Although uncertainty remains high, comments from Fed governor Waller supporting a July rate cut have put downward pressure on Treasury rates while the muni market struggles with: weakening fund demand, heavy supply and growing secondary offerings, particularly for maturities beyond the 10-year tenor. Looking at inflation expectations via inflation swaps, the market’s concerns become increasingly evident with two-year inflation swaps now over 3%, which is a level we haven’t seen since early 2023. In addition, with potentially higher tariffs being implemented on August 1, inflation anxiety is likely to be a significant factor this week.
Over the past week, Treasury yields past 10-years have generally declined by approximately 5 basis points while shorter Treasury yields survived the week essentially unchanged, resulting in a flatter Treasury curve. The municipal yield curve, on the other hand, moved higher with continued strong issuance and diminishing institutional demand paving a path to higher yields by approximately 15 to 23 basis points for tenors past 10-years. Looking at the 2s10s spread, which is the difference between the 10-year yield and the 2-year yield as an indicator of the steepness of the yield curve, the municipal curve has recently reached the steepest slope in over 2-years. This is an invitation for bond investors to extend duration.
Strategy and Insights
Slopes along the municipal curve continue to steepen significantly past 5-years, with an overall slope of 92 basis points from 6 to 11-years. Although the 20-year portion of the curve remains appealing on a relative value basis, with yields at 90% of equivalent Treasuries and almost 95% of the entire 30-year municipal curve. However, past this point the yield curve discourages extension by flattening to just a basis point or two per year.
Muni/Treasury ratios have generally cheapened during this past week. Currently, 10-year munis are yielding over 75% of equivalent Treasuries and 30-year munis are yielding over 95% of equivalent Treasuries. Although ratios are rewarding extension out to the long-end of the yield curve, the slope of the curve flattens out significantly past 20-years which diminishes the reward to a traditional muni investors of duration extension.
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.