Last week, there was a global selloff in government bonds as markets recalibrated inflation risk amid surging energy prices and speculation that central banks will tighten monetary policy. The Bureau of Labor Statistics (BLS) released its CPI report last Tuesday, which indicated that prices rose 0.6% from March and 3.8% from a year earlier. This is the highest annual reading since May 2023 and significantly above the 0.3% and 2.7% that economists had forecast. To compound matters, on Wednesday, the BLS released its Producer Price Index which showed prices climbing 6% year-over-year in April. The resulting selloff was propelled by climbing crude oil prices and a US-Chinese summit that delivered only modest results and no breakthroughs on the war in Iran. Not surprisingly, the sentiment in the Fed funds futures market has fluctuated dramatically over the past month from the Fed cutting rates to the Fed now hiking rates as soon as next March.
Insights and Strategy
The selloff over this past week included both munis and Treasuries with Treasuries little changed for tenors under 2-years and 18-20 bps higher from five to ten years declining to 15 bps higher at 30-years. Munis generally lagged behind Treasuries with a more uniform parallel shift upward by about ten bps across the yield curve. Despite these developments, investors continue to be rewarded for extending out the yield curve with the steepest yields in the 18-21-year maturity range. The slope at the long-end of the municipal yield curve has increased past 20-years, but remains relatively flat with a total slope of 32 bps from 21-30-years. Due to this flat tail, municipal bond investors can currently buy 20-year maturities that yield over 90% of the 30-year curve versus less than 70% for 10-year maturities.
Although municipal/Treasury ratios generally declined over the past week, the short-end of the yield curve actually increased due to the muted response from Treasuries in this part of the curve. Municipal bond ratios have now fallen just below several important reference points along the curve. Ratios for 10-year municipal yields are under 70% of Treasuries, 20-year ratios are below 80% and 30-year ratios are below 90% of Treasuries. For investors seeking to maximize curve positioning with relative value, the 19 to 21-year part of the municipal yield curve is attractive with slopes of 12 to 13-bps per year and yields around 80% of Treasuries. Although ratios past 20-years are more attractive, relative to Treasuries, the yield curve is very flat over these longer tenors and investors are not being appropriately compensated to take the additional risk.
The municipal new issue calendar continues to be heavy this week with US state and local governments expected to sell over $11 billion of bonds. Notable deals include: the School District of Philadelphia, which plans to sell $797.5 million; Great Lakes Water Authority Water Supply System Revenue is expected to sell $754 million; Missouri Highway & Transportation Commission is on the calendar with $609 million; and, Massachusetts Educational Financing Authority is expected to bring $388.4 million to market. Despite record issuance this year, technical conditions remain supportive of the primary market. Last week, municipal bond investors added approximately $1.3 billion to municipal-bond funds, according to LSEG Lipper Global Fund Flows. Furthermore, May tax-exempt reinvestment proceeds are expected to reach approximately $34.5 billion.
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.
May 18, 2026 | Timothy Iltz
Overview
Last week, there was a global selloff in government bonds as markets recalibrated inflation risk amid surging energy prices and speculation that central banks will tighten monetary policy. The Bureau of Labor Statistics (BLS) released its CPI report last Tuesday, which indicated that prices rose 0.6% from March and 3.8% from a year earlier. This is the highest annual reading since May 2023 and significantly above the 0.3% and 2.7% that economists had forecast. To compound matters, on Wednesday, the BLS released its Producer Price Index which showed prices climbing 6% year-over-year in April. The resulting selloff was propelled by climbing crude oil prices and a US-Chinese summit that delivered only modest results and no breakthroughs on the war in Iran. Not surprisingly, the sentiment in the Fed funds futures market has fluctuated dramatically over the past month from the Fed cutting rates to the Fed now hiking rates as soon as next March.
Insights and Strategy
The selloff over this past week included both munis and Treasuries with Treasuries little changed for tenors under 2-years and 18-20 bps higher from five to ten years declining to 15 bps higher at 30-years. Munis generally lagged behind Treasuries with a more uniform parallel shift upward by about ten bps across the yield curve. Despite these developments, investors continue to be rewarded for extending out the yield curve with the steepest yields in the 18-21-year maturity range. The slope at the long-end of the municipal yield curve has increased past 20-years, but remains relatively flat with a total slope of 32 bps from 21-30-years. Due to this flat tail, municipal bond investors can currently buy 20-year maturities that yield over 90% of the 30-year curve versus less than 70% for 10-year maturities.
Although municipal/Treasury ratios generally declined over the past week, the short-end of the yield curve actually increased due to the muted response from Treasuries in this part of the curve. Municipal bond ratios have now fallen just below several important reference points along the curve. Ratios for 10-year municipal yields are under 70% of Treasuries, 20-year ratios are below 80% and 30-year ratios are below 90% of Treasuries. For investors seeking to maximize curve positioning with relative value, the 19 to 21-year part of the municipal yield curve is attractive with slopes of 12 to 13-bps per year and yields around 80% of Treasuries. Although ratios past 20-years are more attractive, relative to Treasuries, the yield curve is very flat over these longer tenors and investors are not being appropriately compensated to take the additional risk.
The municipal new issue calendar continues to be heavy this week with US state and local governments expected to sell over $11 billion of bonds. Notable deals include: the School District of Philadelphia, which plans to sell $797.5 million; Great Lakes Water Authority Water Supply System Revenue is expected to sell $754 million; Missouri Highway & Transportation Commission is on the calendar with $609 million; and, Massachusetts Educational Financing Authority is expected to bring $388.4 million to market. Despite record issuance this year, technical conditions remain supportive of the primary market. Last week, municipal bond investors added approximately $1.3 billion to municipal-bond funds, according to LSEG Lipper Global Fund Flows. Furthermore, May tax-exempt reinvestment proceeds are expected to reach approximately $34.5 billion.
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.