Fixed Income Market Insights

Munis delivered a strong week, outperforming Treasuries across the curve as favorable technicals, tax-loss harvesting flows, and a dovish-leaning Fed hold pushed yields lower.

Municipal yields have eased roughly 10 basis points over the past week, though they remain elevated compared to two months ago. Steady reinvestment demand, lower supply, institutional repositioning, and relatively stable rates have buyers picking up paper.

Inflation expectations are climbing again, and that helps explain why yields are not coming down and continue to move higher.

The fourth quarter opened where September left off. The 10-year Treasury briefly touched 5.34% this morning, its highest level since 2002, before settling near 5.32%, and the 30-year reached 5.67%, a 24-year high.

Municipal bonds traded down in price this week, pushing yields on benchmark securities to their highest levels since at least 2011.

The Federal Reserve raised its target rate a quarter point to a range of 3.75% to 4% this week, its first hike since 2023.

Heading into the September 16 FOMC decision, swaps and futures markets imply roughly 60% odds that the Fed lifts its target range to 3.75%–4%.

The municipal market has been caught up in a broader global bond selloff over the past few weeks, driven by rising oil prices and inflation concerns. Treasury yields moved higher alongside munis, and the move was not confined to the U.S.

Munis’ federal tax exemption is doing double duty this month, keeping borrowing costs manageable for issuers while handing investors some of the highest tax-adjusted yields in years.

On Wednesday, the Treasury Department said it would at least double the size of its liquidity support buyback operations for securities in the 10-year to 30-year sector, Secretary Scott Bessent’s latest attempt to rein in long-term borrowing costs from multi-year highs.

This week’s data leans one direction: cooling. Core CPI matched the slowest annual pace since March 2021 at 2.5%, and nonfarm payrolls fell by 23,000, with a net 103,000 jobs cut from May and June estimates.

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