Following a record 43-day shutdown, the President signed legislation to reopen the government last Wednesday. Although the government has reopened, there is a sizable backlog of government economic data that was not available during the shutdown. The bond market is currently bracing for a flood of data as traders anxiously pare December rate cut expectations. As of this morning, the Fed funds futures market was only pricing-in a 41% chance of a 25 basis-point cut in December. Current rate expectations have declined significantly from last week, when the implied probability was in the 60’s. The tone has turned decidedly more hawkish as several FOMC members have recently cited heightened inflation concerns, which prompted a sell-off in Treasuries last Thursday.
Not surprisingly, this irresolute sentiment has resulted in Treasury yields that remain little changed from when the shut-down began on October 1. However, the municipal market has demonstrated more conviction with steady demand and appealing relative yields weighing on the long-end while shifting dynamics on the short-end have led to municipals selling-off. As a result, we have seen the municipal yield curve flatten, resulting in declining slopes and less incentive to extend duration.
Insights and Strategy
Slopes along the municipal yield curve are currently steepest around the 17-year tenor, with almost 75 bps in slope from 13 to 19-years. This is a significant change from earlier last month, when the steepest slopes were around the 10-year tenor. This shift has increased the reward to investors for extending from the 10-year range to the 15-20-year range. Although the municipal yield curve rewards duration, the long-end continues to be very flat with steadily declining slopes from 20 to 30-years and only a basis point or so per year past 25-years. However, as a result of this flat tail, municipal bond investors can buy maturities under 20-years that yield over 90% of the 30-year curve.
Municipal credit spreads, which are the difference in yield between the ‘AAA’ yields and riskier bonds of equivalent maturities, continue to reward risk in lower investment grade securities while ‘AA’ and ‘A’ bonds have been trading fairly tightly this year. In recent months we have seen lower investment grade credit spreads fluctuate as economic concerns have emerged prompting investors to demand more yield to compensate for the additional risk. While current credit spreads are appealing for ‘BBB’ rated bonds, caution is still warranted as these spreads can widen significantly during economic events.
The muni/Treasury ratio is a widely watched measure that provides a sense of how tax-exempt munis fare against taxable fixed-income options. Crossover investors, which seek to identify the best opportunities in the fixed income universe on an after-tax basis, closely follow this ratio. Over the past month, the biggest moves have been in maturities around the 10-year mark where ratios have become over 4% richer, with ratios now around 66%. From a historical perspective, the 10-year mean for the 10-year maturity is 82.59%, which shows how richly valued municipals have become in this art of the curve. For investors seeking to maximize curve positioning with relative value, extending to the 18-year part of the municipal yield curve provides almost 90% of the 30-year maturity and almost 80% of equivalent Treasury yields.
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.
November 17, 2025 | Timothy Iltz
Overview
Following a record 43-day shutdown, the President signed legislation to reopen the government last Wednesday. Although the government has reopened, there is a sizable backlog of government economic data that was not available during the shutdown. The bond market is currently bracing for a flood of data as traders anxiously pare December rate cut expectations. As of this morning, the Fed funds futures market was only pricing-in a 41% chance of a 25 basis-point cut in December. Current rate expectations have declined significantly from last week, when the implied probability was in the 60’s. The tone has turned decidedly more hawkish as several FOMC members have recently cited heightened inflation concerns, which prompted a sell-off in Treasuries last Thursday.
Not surprisingly, this irresolute sentiment has resulted in Treasury yields that remain little changed from when the shut-down began on October 1. However, the municipal market has demonstrated more conviction with steady demand and appealing relative yields weighing on the long-end while shifting dynamics on the short-end have led to municipals selling-off. As a result, we have seen the municipal yield curve flatten, resulting in declining slopes and less incentive to extend duration.
Insights and Strategy
Slopes along the municipal yield curve are currently steepest around the 17-year tenor, with almost 75 bps in slope from 13 to 19-years. This is a significant change from earlier last month, when the steepest slopes were around the 10-year tenor. This shift has increased the reward to investors for extending from the 10-year range to the 15-20-year range. Although the municipal yield curve rewards duration, the long-end continues to be very flat with steadily declining slopes from 20 to 30-years and only a basis point or so per year past 25-years. However, as a result of this flat tail, municipal bond investors can buy maturities under 20-years that yield over 90% of the 30-year curve.
Municipal credit spreads, which are the difference in yield between the ‘AAA’ yields and riskier bonds of equivalent maturities, continue to reward risk in lower investment grade securities while ‘AA’ and ‘A’ bonds have been trading fairly tightly this year. In recent months we have seen lower investment grade credit spreads fluctuate as economic concerns have emerged prompting investors to demand more yield to compensate for the additional risk. While current credit spreads are appealing for ‘BBB’ rated bonds, caution is still warranted as these spreads can widen significantly during economic events.
The muni/Treasury ratio is a widely watched measure that provides a sense of how tax-exempt munis fare against taxable fixed-income options. Crossover investors, which seek to identify the best opportunities in the fixed income universe on an after-tax basis, closely follow this ratio. Over the past month, the biggest moves have been in maturities around the 10-year mark where ratios have become over 4% richer, with ratios now around 66%. From a historical perspective, the 10-year mean for the 10-year maturity is 82.59%, which shows how richly valued municipals have become in this art of the curve. For investors seeking to maximize curve positioning with relative value, extending to the 18-year part of the municipal yield curve provides almost 90% of the 30-year maturity and almost 80% of equivalent Treasury yields.
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.