Attentions are focused on the Fed this week with their rate decision scheduled to be announced on Wednesday. Traders are positioning ahead of Wednesday’s meeting with Fed funds futures continuing to demonstrate conviction of a 25 bps cut. However, inflation has been creeping higher in recent months and is keeping the Fed cautious. Last week, the Consumer Price Index for All Urban Consumers increased 0.4% on a seasonally adjusted basis for August after rising 0.2% in July. The all-items index rose 2.9 percent for the 12-month period ending August, which is significantly above the Fed’s 2% inflation target. However, many traders are arguing that weaker jobs data outweighs concerns of higher prices. Last week the Bureau of Labor Statistics reported the U.S. labor market added 911,000 fewer jobs than previously reported, which many in the bond market are interpreting as additional justification for the Fed to cut rates later this week.
Not surprisingly, both the Treasury market and the muni market rallied last week as investors rush to maximize yields ahead of the anticipated Fed rate cut. Treasury yields are now about 4.5 basis points lower on the long-end while munis experienced more meaningful moves with long munis now about 15.5 basis points lower than at the start of last week. These moves have resulted in muni/Treasury ratios grinding lower with the largest adjustments around the 10-year tenor and a weekly change of over 4% in this range. Nevertheless, long munis continue to provide compelling relative value with 20-year munis yielding almost 87% of Treasuries and 30-year munis yielding over 90% of Treasuries.
Insights and Strategy
From a strategy perspective, caution is warranted where risk is not rewarded. Investors should exercise caution when extending duration to avoid those parts of the yield curve where extension is not rewarded with additional yield. Tenors past 20-years, particularly in the high-yield sectors, should be approached with caution around the inflection points where yield tapers-off, particularly around the 20-Year mark. Currently, the steepest slopes along the muni curve are from 5 to 7-years and from 8 to 12 years, where investors can expect to pick-up approximately 17 basis points for each year they extend. Munis in the 20-year tenor are yielding 95% of the 30-year curve, making this a very appealing place to position new purchases. Even the 12-year tenor, less than half of the 30-year curve, is yielding 75% of the 30-year maturity. Past 20-years, the slope tapers significantly to just a basis point or two per year. For investors with longer mandates, I would consider buying shorter in the 15 to 20-year range and wait until the long-end steepens to extend.
Travelling down the credit ladder, lower rated munis experienced even larger moves with 10-12 year and 25-30-year ‘BBB’ rated hospital bonds rallying 25 bps. These moves have lead to credit spreads compressing and the yield curve flattening on the long-end as investors squeeze out the remaining marginal yield with ‘AAA’ munis yielding an almost ruler flat 80% of ‘BBB’ hospitals past 20-years. This part of the market has historically been very sensitive to liquidity and changing sentiment. However, performance in the high yield space has been inconsistent with ‘BB/B’ –‘BBB’ spreads widening while ‘non-rated’-‘BB/B’ credit spreads compressed.
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.
September 15, 2025 | Timothy Iltz
Overview
Attentions are focused on the Fed this week with their rate decision scheduled to be announced on Wednesday. Traders are positioning ahead of Wednesday’s meeting with Fed funds futures continuing to demonstrate conviction of a 25 bps cut. However, inflation has been creeping higher in recent months and is keeping the Fed cautious. Last week, the Consumer Price Index for All Urban Consumers increased 0.4% on a seasonally adjusted basis for August after rising 0.2% in July. The all-items index rose 2.9 percent for the 12-month period ending August, which is significantly above the Fed’s 2% inflation target. However, many traders are arguing that weaker jobs data outweighs concerns of higher prices. Last week the Bureau of Labor Statistics reported the U.S. labor market added 911,000 fewer jobs than previously reported, which many in the bond market are interpreting as additional justification for the Fed to cut rates later this week.
Not surprisingly, both the Treasury market and the muni market rallied last week as investors rush to maximize yields ahead of the anticipated Fed rate cut. Treasury yields are now about 4.5 basis points lower on the long-end while munis experienced more meaningful moves with long munis now about 15.5 basis points lower than at the start of last week. These moves have resulted in muni/Treasury ratios grinding lower with the largest adjustments around the 10-year tenor and a weekly change of over 4% in this range. Nevertheless, long munis continue to provide compelling relative value with 20-year munis yielding almost 87% of Treasuries and 30-year munis yielding over 90% of Treasuries.
Insights and Strategy
From a strategy perspective, caution is warranted where risk is not rewarded. Investors should exercise caution when extending duration to avoid those parts of the yield curve where extension is not rewarded with additional yield. Tenors past 20-years, particularly in the high-yield sectors, should be approached with caution around the inflection points where yield tapers-off, particularly around the 20-Year mark. Currently, the steepest slopes along the muni curve are from 5 to 7-years and from 8 to 12 years, where investors can expect to pick-up approximately 17 basis points for each year they extend. Munis in the 20-year tenor are yielding 95% of the 30-year curve, making this a very appealing place to position new purchases. Even the 12-year tenor, less than half of the 30-year curve, is yielding 75% of the 30-year maturity. Past 20-years, the slope tapers significantly to just a basis point or two per year. For investors with longer mandates, I would consider buying shorter in the 15 to 20-year range and wait until the long-end steepens to extend.
Travelling down the credit ladder, lower rated munis experienced even larger moves with 10-12 year and 25-30-year ‘BBB’ rated hospital bonds rallying 25 bps. These moves have lead to credit spreads compressing and the yield curve flattening on the long-end as investors squeeze out the remaining marginal yield with ‘AAA’ munis yielding an almost ruler flat 80% of ‘BBB’ hospitals past 20-years. This part of the market has historically been very sensitive to liquidity and changing sentiment. However, performance in the high yield space has been inconsistent with ‘BB/B’ –‘BBB’ spreads widening while ‘non-rated’-‘BB/B’ credit spreads compressed.
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.