Treasury and municipal market yields rallied over this past week as the market fixated on the potential for the Fed to cut rates earlier than previously forecast. Sentiment was driven by dovish Fedspeak from Fed governors Bowman and Waller, first quarter GDP revisions to -0.5% and a benign May PCE report, all of which bolstered rate cut expectations. The futures market is now anticipating the Fed could cut rates as soon as September. However, Fed Chair Powell’s comments made last week to the House Financial Services Committee were clear, that the Fed is well positioned to wait citing elevated inflation and intensifying price pressures. Powell also commented that signs of weakness in the labor market would change the Fed’s stance. As a result, we may see some volatility in the capital markets following this week’s employment data releases on Tuesday and Thursday.
Ratios and Strategy
Over the past month, Treasury yields have rallied roughly 15-basis points from 2 to 10-years with a steeper dip of 23 basis points around the 15-year mark. While municipal yields held relatively steady, with declines of approximately 10 to 15-basis points from 2 to 10-years and 1 to 2 basis points for maturities past 15-years. As a result, muni/Treasury ratios have generally become more attractive with ratios enticing investors to extend portfolio durations with significantly higher ratios on longer maturities. Currently, 10-year munis are yielding over 76% of equivalent Treasuries and 30-year munis are yielding over 93% of equivalent Treasuries. The slope of the municipal yield curve is also rewarding extension with multiple spans along the yield curve in excess of 10 basis points per year. The steepest slopes have formed around the 10-year maturity, with an overall slope of 45 basis points from 9 to 11-years. Further out the municipal yield curve, slopes remain steep from 15 to 18-years, with an overall slope of 45 basis points. Slopes after this point taper off dramatically to just a basis point or two on the extreme long-end. The flattening on the longer-end of the yield curve allows investors to buy 17-year maturities with yields that are 90% of the 30-year municipal maturity.
Although municipal bond mutual fund flows have been steadily weakening, supply/demand technical conditions remain strong with nine consecutive weeks of positive fund flows and investors anticipating $45 billion of interest payments, maturing and called principal this week. LSEG Lipper Global Fund Flows reported municipal bond mutual funds saw an additional $76.9 million from investors. The majority of the inflows were directed to high-yield funds, which registered an additional $45.4 million compared to the previous week’s $57.7 million. This week, the calendar has contracted to $5.78 billion, which is relatively heavy for a holiday week with an early close. This past June is anticipated to be the largest June on-record for issuance and year-to-date, municipal issuance has already reached $277.8 billion, which is 17.8% ahead of last -year at this time.
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.
June 30, 2025 | Timothy Iltz
Overview
Treasury and municipal market yields rallied over this past week as the market fixated on the potential for the Fed to cut rates earlier than previously forecast. Sentiment was driven by dovish Fedspeak from Fed governors Bowman and Waller, first quarter GDP revisions to -0.5% and a benign May PCE report, all of which bolstered rate cut expectations. The futures market is now anticipating the Fed could cut rates as soon as September. However, Fed Chair Powell’s comments made last week to the House Financial Services Committee were clear, that the Fed is well positioned to wait citing elevated inflation and intensifying price pressures. Powell also commented that signs of weakness in the labor market would change the Fed’s stance. As a result, we may see some volatility in the capital markets following this week’s employment data releases on Tuesday and Thursday.
Ratios and Strategy
Over the past month, Treasury yields have rallied roughly 15-basis points from 2 to 10-years with a steeper dip of 23 basis points around the 15-year mark. While municipal yields held relatively steady, with declines of approximately 10 to 15-basis points from 2 to 10-years and 1 to 2 basis points for maturities past 15-years. As a result, muni/Treasury ratios have generally become more attractive with ratios enticing investors to extend portfolio durations with significantly higher ratios on longer maturities. Currently, 10-year munis are yielding over 76% of equivalent Treasuries and 30-year munis are yielding over 93% of equivalent Treasuries. The slope of the municipal yield curve is also rewarding extension with multiple spans along the yield curve in excess of 10 basis points per year. The steepest slopes have formed around the 10-year maturity, with an overall slope of 45 basis points from 9 to 11-years. Further out the municipal yield curve, slopes remain steep from 15 to 18-years, with an overall slope of 45 basis points. Slopes after this point taper off dramatically to just a basis point or two on the extreme long-end. The flattening on the longer-end of the yield curve allows investors to buy 17-year maturities with yields that are 90% of the 30-year municipal maturity.
Although municipal bond mutual fund flows have been steadily weakening, supply/demand technical conditions remain strong with nine consecutive weeks of positive fund flows and investors anticipating $45 billion of interest payments, maturing and called principal this week. LSEG Lipper Global Fund Flows reported municipal bond mutual funds saw an additional $76.9 million from investors. The majority of the inflows were directed to high-yield funds, which registered an additional $45.4 million compared to the previous week’s $57.7 million. This week, the calendar has contracted to $5.78 billion, which is relatively heavy for a holiday week with an early close. This past June is anticipated to be the largest June on-record for issuance and year-to-date, municipal issuance has already reached $277.8 billion, which is 17.8% ahead of last -year at this time.
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.