Over the past week, yields in the municipal and Treasury markets have moved in opposite directions as uncertainty and volatility continue to be prominent themes in the fixed income markets. Based upon guidance from the Fed, traders are betting policymakers will remain in wait-and-see mode until there’s more clarity on tariffs. As a result, the longer policy uncertainty persists, the greater the potential economic impact. Although, the futures market is pricing in over a 98% chance the Federal Reserve will leave rates unchanged at their meeting later this week, the market is anticipating a 25 bps cut as soon as the July 30 meeting. In addition, the market is anticipating three rate cuts this year which seems questionable given job gains reported by the BLS last week and the Fed’s previous comments regarding timing. Nevertheless, the primary concern is not whether or not the fed cuts rates, but rather the specific language used by the Fed in its message and the potential volatility should the Fed indicate increased likelihood of a recession. Although we are seeing more confidence in the long-end of the yield curve, particularly in municipals, investors remain cautious amid the uncertainty.
Ratios and Strategy
Treasury tenors past one-year saw yields increase over the past week while municipal yields across the curve dropped lower. The reason for this divergence can largely be attributed to market technical, with municipal bond mutual funds and ETFs recording strong inflows amid a somewhat lighter calendar. Slopes along the muni curve continue to be steepest around the 9-12-year tenor of the curve, with a slope of 24 bps over 4-years, and the 15-17-year tenor of the curve, with a slope of 33 bps over a period of just 3-years. The 15-17 year tenor of the municipal curve offers an appealing combination of a relatively steep slope and meaningful yield, allowing investors to lock-in over 90% of the yield on the 30-year municipal maturity and over 80% of equivalent Treasury yields.
Although long-term ratios remain appealing, the yield differential between long-term muni and Treasuries has widened over the past week. Although ratios dropped throughout the yield curve, they experienced their largest moves in the 5-10-year range. Despite declines experienced over the past month, ratios have become dramatically more appealing on the short-end of the curve from 65.84% last month to over 70% this past week. At the long-end, municipal bonds are still yielding over 90% of Treasury bonds, which is continues to be appealing to investors.
Last week LSEG Lipper Global Fund Flows reported municipal bond mutual funds experienced $1.567 billion of inflows following seven consecutive weeks of outflows. This is the largest inflow figure since January and is partly responsible for driving yields lower on the long-end of the municipal yield curve. The new issue calendar is a little lighter this week with an anticipated $9 billion in new supply, excluding deals considered day-to-day, with the Massachusetts Institute of Technology planning to sell $750 million, Dartmouth Health Obligated Group selling $420 million and the Indianapolis Bond Bank selling $285 million.
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 5, 2025 | Timothy Iltz
Overview
Over the past week, yields in the municipal and Treasury markets have moved in opposite directions as uncertainty and volatility continue to be prominent themes in the fixed income markets. Based upon guidance from the Fed, traders are betting policymakers will remain in wait-and-see mode until there’s more clarity on tariffs. As a result, the longer policy uncertainty persists, the greater the potential economic impact. Although, the futures market is pricing in over a 98% chance the Federal Reserve will leave rates unchanged at their meeting later this week, the market is anticipating a 25 bps cut as soon as the July 30 meeting. In addition, the market is anticipating three rate cuts this year which seems questionable given job gains reported by the BLS last week and the Fed’s previous comments regarding timing. Nevertheless, the primary concern is not whether or not the fed cuts rates, but rather the specific language used by the Fed in its message and the potential volatility should the Fed indicate increased likelihood of a recession. Although we are seeing more confidence in the long-end of the yield curve, particularly in municipals, investors remain cautious amid the uncertainty.
Ratios and Strategy
Treasury tenors past one-year saw yields increase over the past week while municipal yields across the curve dropped lower. The reason for this divergence can largely be attributed to market technical, with municipal bond mutual funds and ETFs recording strong inflows amid a somewhat lighter calendar. Slopes along the muni curve continue to be steepest around the 9-12-year tenor of the curve, with a slope of 24 bps over 4-years, and the 15-17-year tenor of the curve, with a slope of 33 bps over a period of just 3-years. The 15-17 year tenor of the municipal curve offers an appealing combination of a relatively steep slope and meaningful yield, allowing investors to lock-in over 90% of the yield on the 30-year municipal maturity and over 80% of equivalent Treasury yields.
Although long-term ratios remain appealing, the yield differential between long-term muni and Treasuries has widened over the past week. Although ratios dropped throughout the yield curve, they experienced their largest moves in the 5-10-year range. Despite declines experienced over the past month, ratios have become dramatically more appealing on the short-end of the curve from 65.84% last month to over 70% this past week. At the long-end, municipal bonds are still yielding over 90% of Treasury bonds, which is continues to be appealing to investors.
Last week LSEG Lipper Global Fund Flows reported municipal bond mutual funds experienced $1.567 billion of inflows following seven consecutive weeks of outflows. This is the largest inflow figure since January and is partly responsible for driving yields lower on the long-end of the municipal yield curve. The new issue calendar is a little lighter this week with an anticipated $9 billion in new supply, excluding deals considered day-to-day, with the Massachusetts Institute of Technology planning to sell $750 million, Dartmouth Health Obligated Group selling $420 million and the Indianapolis Bond Bank selling $285 million.
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.