Day-to-day volatility remains high in the fixed income markets with the war in the Middle East continuing to dominate headlines. At the Fed’s meeting last week, the Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent. The Fed Chair expressed a cautious outlook, noting that current inflation levels are being driven by factors pre-dating the conflict in Iran and estimating that between half and three-quarters of total core inflation is actually tariffs. In addition, the Chair commented that typically the Fed looks through energy shocks and expects to see inflation improving around the middle of this year. The current uncertainty has resulted in a choppy Fed funds futures market with current pricing not indicating any rate cuts over the next 12-months.
Over the past week, both munis and Treasuries have generally sold-off with Treasuries outperforming as munis catch-up. Since the outbreak of the war in the Middle East, munis and Treasuries have sold-off by roughly 30 to 40 bps for maturities longer than 20-years. The largest moves in Treasuries have not been around the policy sensitive 2-4 year maturities, where Treasuries have sold-off roughly 45 bps. However, municipals have experienced their biggest moves around the 8 to 14-year maturities where they have sold-off by close to 50 bps from February 28, at the beginning of the war with Iran.
Insights and Strategy
On the trade desk we have noted that a combination of new issue supply and a lack of inquiry has lead to weakness around the 10-year maturity, while trading has become relaxed on the short-end with muni/Treasury ratios loosening up. As a result, municipal/Treasury ratios have increasingly become more appealing in the 5 to 10-year tenors with ratios now approaching 70% and making this a significantly more appealing portion of the curve to position. Despite shifting muni/Treasury ratios, slopes along the municipal yield curve continue to reward extending duration. Investors are currently incented to move out the yield curve with steepening yields around the 11-20 year range, with an overall slope of 109 bps. However, the yield curve becomes very flat past 20-years, with a total slope of only 24 bps for 20-30-years. Currently, the steepest slopes on the municipal curve are available from 17 to 21-years where investors can pick-up approximately 60 bps.
Although municipal ratios past 20-years remain attractive relative to Treasuries, the yield curve remains very flat over these longer tenors. Due to the flat tail that has formed at the end of the municipal yield curve, investors can currently buy maturities under 20-years that yield almost 90% of the 30-year curve. For investors seeking to maximize curve positioning with relative value, the 17 to 20-year part of the municipal yield curve offers progressively improving opportunities with slopes of 12 to 13-bps per year.
The new issue municipal calendar picks-up this week and is expected to include $15.9 billion of new issues. Notable deals include: the City of New York, which plans to sell $2.58 billion; the State of Illinois is scheduled to sell $1.4 billion, and the UPMC Obligated Group is expected to sell $1.2 billion. According to LSEG Lipper Global Fund Flows, investors added roughly $1.8 billion to municipal bond funds last week. Long-term funds reportedly received $1.5 billion and high-yield funds added about $651 million. Considering current muni/Treasury ratios, it is not surprising that the majority of inflows are going to intermediate and long-term muni funds.
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.
March 23, 2026 | Timothy Iltz
Overview
Day-to-day volatility remains high in the fixed income markets with the war in the Middle East continuing to dominate headlines. At the Fed’s meeting last week, the Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent. The Fed Chair expressed a cautious outlook, noting that current inflation levels are being driven by factors pre-dating the conflict in Iran and estimating that between half and three-quarters of total core inflation is actually tariffs. In addition, the Chair commented that typically the Fed looks through energy shocks and expects to see inflation improving around the middle of this year. The current uncertainty has resulted in a choppy Fed funds futures market with current pricing not indicating any rate cuts over the next 12-months.
Over the past week, both munis and Treasuries have generally sold-off with Treasuries outperforming as munis catch-up. Since the outbreak of the war in the Middle East, munis and Treasuries have sold-off by roughly 30 to 40 bps for maturities longer than 20-years. The largest moves in Treasuries have not been around the policy sensitive 2-4 year maturities, where Treasuries have sold-off roughly 45 bps. However, municipals have experienced their biggest moves around the 8 to 14-year maturities where they have sold-off by close to 50 bps from February 28, at the beginning of the war with Iran.
Insights and Strategy
On the trade desk we have noted that a combination of new issue supply and a lack of inquiry has lead to weakness around the 10-year maturity, while trading has become relaxed on the short-end with muni/Treasury ratios loosening up. As a result, municipal/Treasury ratios have increasingly become more appealing in the 5 to 10-year tenors with ratios now approaching 70% and making this a significantly more appealing portion of the curve to position. Despite shifting muni/Treasury ratios, slopes along the municipal yield curve continue to reward extending duration. Investors are currently incented to move out the yield curve with steepening yields around the 11-20 year range, with an overall slope of 109 bps. However, the yield curve becomes very flat past 20-years, with a total slope of only 24 bps for 20-30-years. Currently, the steepest slopes on the municipal curve are available from 17 to 21-years where investors can pick-up approximately 60 bps.
Although municipal ratios past 20-years remain attractive relative to Treasuries, the yield curve remains very flat over these longer tenors. Due to the flat tail that has formed at the end of the municipal yield curve, investors can currently buy maturities under 20-years that yield almost 90% of the 30-year curve. For investors seeking to maximize curve positioning with relative value, the 17 to 20-year part of the municipal yield curve offers progressively improving opportunities with slopes of 12 to 13-bps per year.
The new issue municipal calendar picks-up this week and is expected to include $15.9 billion of new issues. Notable deals include: the City of New York, which plans to sell $2.58 billion; the State of Illinois is scheduled to sell $1.4 billion, and the UPMC Obligated Group is expected to sell $1.2 billion. According to LSEG Lipper Global Fund Flows, investors added roughly $1.8 billion to municipal bond funds last week. Long-term funds reportedly received $1.5 billion and high-yield funds added about $651 million. Considering current muni/Treasury ratios, it is not surprising that the majority of inflows are going to intermediate and long-term muni funds.
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.