The shutdown, which is now the third longest government shutdown in U.S. history, continues to populate headlines. In addition, markets are operating without the usual government sourced economic data from the Bureau of Labor Statistics and the Bureau of Economic Analysis. Absent this data, the markets have been looking to private sources and anecdotal data from businesses for guidance. However, data from these sources is less than optimal and is typically not as broad or representative of the economy as government data sets. Due to the weakening job market and a lack of updated government data to demonstrate otherwise, the markets are operating under the assumption the Fed will make another quarter of a point cut at its meeting next week. Last week, Fed chair Jerome Powell indicated that economic concerns of the Fed had not changed during the data blackout. The Fed funds futures market is currently indicating an almost certain 94.6% chance of a 25bps rate cut at the Fed’s October 29 meeting and an additional 25bps cut in December.
Over the past week, Treasury and municipal markets have been largely unphased by the shutdown or the regional bank distress with yields experiencing minimal change on the long end of the yield curve. Treasury yields rallied about 4.55 bps versus 5.5 bps for munis. On the more policy sensitive short tenors under 2-years, yields differed with Treasuries selling-off a little over 5 bps and munis rallying around 3 bps. Treasuries have lately been responding to haven buying, trade tensions and anxiety related to regional bank credit exposure.
Insights and Strategy
Slopes along the municipal yield curve are currently steepest around the 17-year tenor, with over 61 bps in slope from 13 to 18-years. This is a significant change from earlier this month, when the steepest slopes were around the 10-year tenor. This shift increases the reward to investors for extending from the 10-year range to the 15-20-year range. Although the municipal yield curve continues to reward duration, the long-end has become 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 92% of the 30-year curve.
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 around the 10-year maturity where ratios have cheapened close to 10% with ratios now approaching 70%. Although this part of the curve has become significantly more appealing from a relative value perspective, ratios are still rich from a historical perspective with a 10-year mean for this part of the curve at 94.59%. For investors seeking to maximize curve positioning with relative value, the 18-year part of the municipal yield curve currently provides almost 90% of the 30-year maturity and over 80% of equivalent Treasury yields.
Month-to-date, lower-coupon 4s have outperformed in October, benefiting from their longer duration and greater sensitivity to the rally in rates. Against the backdrop of falling yields, lower coupon bonds have recently experienced stronger price appreciation versus higher coupon bonds, which are less responsive in a declining rate environment. However, this week we are anticipating a full municipal calendar with over $15 billion in new issues. Overall, with the potential for Treasury volatility amid the government shutdown and heavy supply from the municipal calendar, continued outperformance from lower coupon bonds may prove challenging this week.
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.
October 20, 2025 | Timothy Iltz
Overview
The shutdown, which is now the third longest government shutdown in U.S. history, continues to populate headlines. In addition, markets are operating without the usual government sourced economic data from the Bureau of Labor Statistics and the Bureau of Economic Analysis. Absent this data, the markets have been looking to private sources and anecdotal data from businesses for guidance. However, data from these sources is less than optimal and is typically not as broad or representative of the economy as government data sets. Due to the weakening job market and a lack of updated government data to demonstrate otherwise, the markets are operating under the assumption the Fed will make another quarter of a point cut at its meeting next week. Last week, Fed chair Jerome Powell indicated that economic concerns of the Fed had not changed during the data blackout. The Fed funds futures market is currently indicating an almost certain 94.6% chance of a 25bps rate cut at the Fed’s October 29 meeting and an additional 25bps cut in December.
Over the past week, Treasury and municipal markets have been largely unphased by the shutdown or the regional bank distress with yields experiencing minimal change on the long end of the yield curve. Treasury yields rallied about 4.55 bps versus 5.5 bps for munis. On the more policy sensitive short tenors under 2-years, yields differed with Treasuries selling-off a little over 5 bps and munis rallying around 3 bps. Treasuries have lately been responding to haven buying, trade tensions and anxiety related to regional bank credit exposure.
Insights and Strategy
Slopes along the municipal yield curve are currently steepest around the 17-year tenor, with over 61 bps in slope from 13 to 18-years. This is a significant change from earlier this month, when the steepest slopes were around the 10-year tenor. This shift increases the reward to investors for extending from the 10-year range to the 15-20-year range. Although the municipal yield curve continues to reward duration, the long-end has become 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 92% of the 30-year curve.
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 around the 10-year maturity where ratios have cheapened close to 10% with ratios now approaching 70%. Although this part of the curve has become significantly more appealing from a relative value perspective, ratios are still rich from a historical perspective with a 10-year mean for this part of the curve at 94.59%. For investors seeking to maximize curve positioning with relative value, the 18-year part of the municipal yield curve currently provides almost 90% of the 30-year maturity and over 80% of equivalent Treasury yields.
Month-to-date, lower-coupon 4s have outperformed in October, benefiting from their longer duration and greater sensitivity to the rally in rates. Against the backdrop of falling yields, lower coupon bonds have recently experienced stronger price appreciation versus higher coupon bonds, which are less responsive in a declining rate environment. However, this week we are anticipating a full municipal calendar with over $15 billion in new issues. Overall, with the potential for Treasury volatility amid the government shutdown and heavy supply from the municipal calendar, continued outperformance from lower coupon bonds may prove challenging this week.
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.