This has been quite a week. There are several events we wish to mark in this week’s commentary.
A Potential Government Shutdown Looms
There is the risk of a government shutdown in two weeks. The Democrats are trying to reverse some of the “big, beautiful tax law” provisions passed this summer.
“Democrats, still smarting from the passage of President Trump’s ‘big,’ beautiful tax law over the summer, are demanding more than $1 trillion in healthcare spending as the price of their support, including extending enhanced Affordable Care Act subsidies and restoring cut Medicaid funds. While Democrats can’t block the House vote, they can stop the measure in the Senate, where 60 votes are required to advance most legislation.” Spaghetti Against the Wall?
A vote on a stopgap funding measure was expected last Friday.
“WASHINGTON—The GOP-controlled House was set to vote Friday on a stopgap measure keeping the government funded until late November, an opening bid ahead of what are expected to be down-to-the-wire talks to avoid a government shutdown in two weeks.” More Spaghetti
The Senate rejected the House GOP proposal to fund the Government through Nov. 21 on Friday:
“The Republican plan, which passed by GOP-controlled House by a vote of 217-212 earlier Friday, fell short of the 60 votes needed to break a filibuster in the Senate: The vote was 44-48, with Sen. John Fetterman of Pennsylvania the only Democrat to vote yes, and Sens. Rand Paul of Kentucky and Lisa Murkowski of Alaska the only Republicans voting no.” Nothing Stuck
A Mandate Revision for the Fed
The Federal Reserve currently functions under two mandates:
But new changes are being proposed:
“House Financial Services Committee Chair French Hill (R-Ark.) has introduced a new bill that would seek to end the Fed's dual mandate so that central bank policymakers could focus exclusively on one goal: controlling inflation.”
Former Kansas City Fed president Esther George was neutral on the idea:
“Former Kansas City Fed president Esther George noted that while Congress is ultimately responsible for setting the Fed's mandate, she is not aware of ‘meaningful differences in outcomes experienced by central banks with single versus dual mandates overall based on the economic literature.’”
The newest member of the Fed board, Stephen Miran, has his own thoughts on an additional mandate. If two are hard, let’s add a third:
“Trump's newest addition to the Fed board, Stephen Miran, has also raised new questions about the Fed's mandate, noting that the statute mandates the central bank effectively perform a third function: promote moderate long-term interest rates in addition to maximum employment and stable prices.” Then there was One
A Little Less Transparency for the Taxable Market:
“Paul Atkins, chairman of the U.S. Securities and Exchange Commission, said his agency will propose a rule change following President Donald Trump’s call to switch quarterly earnings reports to a semiannual schedule.”
The old saying goes that light is the best disinfectant. Well, the SEC, on the president’s direction, proposed adding a little shadow to corporate reporting.
“Atkins said if the rule change is approved, it will be left to companies to decide whether they switch to semiannual or stay with quarterly.
“The issue has come under heated debate as opponents of less frequent reporting argue the lack of transparency would be a detriment to investors, especially retail investors who don’t have as ample resources as Wall Street institutions. “Supporters say a six-month reporting schedule would free up companies to focus their businesses on the longer-term basis.” Less Light
The issue has been debated in CDI. Certain equity folks like the idea, and bond folks want more light.
Finally, the Fed Cut Short-term Rates by 0.25%
On Wednesday, the Fed announced a 0.25% cut in the fed funds rate. This now makes the fed funds range 4.00% – 4.25%. Fed officials also signaled the possibility of two more cuts this year. The reason behind the move is:
“‘Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated,’ the Fed said in a Sept. 17 statement.
“New Fed Governor Stephen Miran dissented, saying he preferred a half-percentage-point cut.
“‘We fully understand and appreciate that we need to remain fully committed to restoring 2% inflation on a sustained basis. And we will do that. At the same time, we've got to weigh the risk to the two goals,’ Powell said, adding that he believes the risks of higher and more persistent inflation have softened because the labor market is weakening and GDP has slowed.” Fed Rate Cut
On Sept. 16, the day before the Fed’s meeting, the ten-year Treasury security ended the day at 4.03%. After the announcement, the ten-year Treasury security yield declined to sub 4.00% before selling off. As of this writing, the ten-year Treasury security is yielding 4.137%. Last September, ten-year rates rose after the Fed’s rate cut, yielding 3.717% on Sept. 19, 2024, and 4.09% a month later.
The following table highlights the market’s implied probability of Fed rate cuts:
CHANGES IN RATES
The Fed announcement of a 0.25% cut in the fed funds rate was initially met with lower yields. Then Treasury rates in longer maturities (longer than one year, that is) moved higher, finishing the week slightly above last week’s close. There might be something to that old adage, “Buy the rumor and sell the fact.” The 2/10-year spread ended the week at 55 basis points, steeper than last week’s 50 basis points.
The municipal market was very quiet on the week. The muni curve has been flattening. The 2/10-year spread in the muni market flattened to 0.83% from last week’s 0.85%.
The municipal market has long been derided for its lack of transparency. The MSRB has taken great pains to improve transparency in the municipal market. As participants in the municipal market, we are glad to see the taxable and equity markets catching up to our brilliance. 😃
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
Treasury-muni ratios decreased throughout the week reflecting the flattening of the curves.
Investment grade corporate bond yields moved slightly higher week over week.
The president was in Great Britian this week for a state visit and may have brokered a new trade agreement. He will also be speaking with China’s leader Xi Jinping on Friday.
The big news out of D.C. was the suspension of “Jimmy Kimmel Live!” due to comments the host made in Monday’s monologue. There have been many reactions to these events. We believe excerpts from the editorial board of the Wall Street Journal’s piece titled “The FCC, Disney and Jimmy Kimmel” captured it best:
“Maybe now our progressive friends understand why these columns oppose government control of business and fought liberal cancel culture. Regulatory power in the hands of a willful president can too easily become a weapon against political opponents, including the media.
“That’s what happened Wednesday as Brendan Carr, President Trump’s man at the Federal Communications Commission, threatened Disney and its affiliates if they didn’t punish late-night host Jimmy Kimmel for comments about Charlie Kirk. ‘We can do this the easy way or the hard way,’ Mr. Carr told a podcaster, in words that could have been uttered by a New Jersey mob boss.”
“The squeeze on Disney looks to be a case of cancel culture on the right. Mr. Kimmel’s comments Monday associating Charlie Kirk’s killer with the “MAGA gang” were false, callous and stupid. But they weren’t inciting violence, and in a free society they shouldn’t be cause for the government to push someone off the airwaves. Compared to the malevolent garbage on social media about Kirk and his killer, Mr. Kimmel’s words were only mildly offensive.”
“The political cycle of using government to punish opponents is taking the country into dark corners that will result in less freedom, and less free speech, for all sides. The best immediate remedy is getting the FCC out of the business of regulating media.” WSJ
The 5-year Breakeven Inflation Rate finished the week of Sept. 19 at 2.35%, 5 basis points higher than the previous week. The 10-year Breakeven Inflation Rate finished the period at 2.39%, 3 basis points higher than last week's observation.
Tuesday’s release of the Fed’s favorite inflation measure, the Personal Consumption Expenditures (PCE) Index, is delayed. Why?
Given the firing of the head of the Bureau of Labor Statistics over employment reports, this announcement is curiouser and curiouser. Or, maybe it’s just a data issue… yeah, that’s it!
The 10-year quality credit spread between BBB revenue less AAA general obligation bonds for last week was at 0.85% versus a historical average of 1.68%, demonstrating very healthy and tight spread metrics.
Investment grade spreads are extremely tight at 0.91%, compared to a historical average of 1.57%. The high-yield spread is lower at 2.54%, compared to a historical average of 4.57%. We believe that both these markets are overpriced on a spread basis.
Money Market Flows (millions of dollars)
Money market fund flows were down last week. As the Fed cuts short-term interest rates, those juicy money market yields will continue to decline — and the rate of decline may increase.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were mixed last week, with municipals seeing nice positive flows.
ETF Fund Flows (millions of dollars)
ETF asset classes continued to experience positive cash flows for the last period.
This week’s tax-exempt market is at $13.5 billion; the deluge continues after a tiny respite.
The Fed is between a rock and a hard place. The employment picture is weakening while tariffs are pushing on inflation — that is, if the market can get accurate reads on time.
Here is another conundrum: if sellers are paying the tariffs, one would expect margins to take a hit, questioning the stock market’s record levels and valuations. If consumers are paying the tariffs, one would expect an economic slowdown, and less money in consumers pockets. All in all, it’s a formula for a round of stagflation, the magnitude of which is yet to be determined.
We at CDI are maintaining our neutral duration stance and, as of now, our over-weight to the shorter end of the curve of our SMA’s investment universe. If the curve steepening in the taxable and municipal markets picks up speed, this strategic alignment may change. We will keep you all informed.
IMPORTANT DISCLOSURES
The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates presented herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.
All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses. Actual portfolio returns may vary due to the timing of portfolio inception and/or investor-imposed restrictions or guidelines. Actual investor portfolio returns would be reduced by any applicable investment advisory fees and other expenses incurred in the management of an advisory account.
You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from City Different Investments. To the extent that a reader has any questions regarding the applicability above to his/her individual situation or any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal or accounting advice.
A copy of City Different Investments' current written disclosure statement discussing our advisory services and fees is available for review upon request.
Unless otherwise noted, City Different Investments is the source of information presented herein.
A description of the indices mentioned herein is available upon request.