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WEEK ENDING 10/3/2025
- Those who caused government shutdown still getting paid through the government shutdown. That’s leadership?
- No jobs number on “Jobs Friday”
- White House withdraws Antoni’s nomination as new head of BLS.
- Shutdown leads to politically motivated funding cuts.
- Stock market hits new highs, baffling us humble fixed-income folk.
A CITY DIFFERENT TAKE
Well, the government shut down at the end of its fiscal year.
The immediate impact for us fixed-income geeks is the delay of well-covered economic data from the government. (Oh, what will we do?) Also continued data monitoring and collection will be suspended, bringing into question future data releases.
Federal Reserve Chair Jerome Powell estimated that the economy must add 50,000 jobs a month to maintain current unemployment levels. (Needed New Jobs) The last available jobs report for August showed that only 22,000 new jobs were created — well below both the average since March 31, 2010 (159,430) and the median of 215,000.
Inflation as measured by the Fed-favorite Core U.S. Personal Consumption Expenditure Index remains at 2.9% — stubbornly above the Fed’s 2.0% target. And thus, you have the Fed’s rock-and-a-hard-place.
The search for alternative data sources has led us to the ADP National Employment Report on private nonfarm payroll levels and the JOLTS reports. The ADP report incorporated the revisions of the last few BLS reports, showing a revised loss of 3,000 jobs in August compared to initially reported gains of 54,000, and a September loss of 32,000 private sector jobs.
On the brighter side, the U.S. Jobs Openings by Industry report (commonly known as the JOLTS report) and associated data showed a stable employment picture with employers neither hiring or laying off employees and folks staying in their current jobs. The job openings per unemployed worker stood at 1.00 in August, below the long-term average (since January 2010) of 1.83 and the associated median of 1.27.
More bad news, the headline reads, “September Job Cuts Fall 37% From August; YTD Total highest since 2020, Lowest YTD Hiring Since 2009”
“U.S.-based employers announced 54,064 job cuts in September, a 37% drop from the 85,979 cuts announced in August. It is down 26% from the 72,821 announced in the same month last year. September marks the third time this year job cuts were lower than the corresponding month one year earlier, according to a report released Thursday from global outplacement and business and executive coaching firm Challenger, Gray & Christmas.” More Private Data
It has been reported that the government shutdown, depending on duration, could cost the economy $7 billion or reduce GDP growth by 0.1% each week. And the clowns in Washington are still getting paid. There is also speculation that the shutdown will add pressure on the Fed to ease short-term interest rates at their next meeting. Current market implied probabilities have increased over the last month and quarter:
CHANGES IN RATES
Treasury Market
Treasury rates moved slightly higher on the week as investors anticipated further Fed rate cuts. The government shutdown did not seem to impact investor behavior. Investors seem to be anticipating a short duration to the conflict. There have been 21 funding gaps since 1977. The last and longest shutdown began in December 2018 and lasted 35 days. (Who holds the record for the longest government shutdown?) The 2/10-year spread stayed range-bound at 57 basis points. That is 2 basis points steeper than last week.
Municipal Market
In the municipal market, the muni curve has been flattening. The 2/10-year spread was also range bound ending the week at 0.65%, 2 basis points lower than last week.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
Treasury-muni ratios widened week over week.
Investment Grade Corporates
Investment grade corporate bond yields moved lower week over week.
THIS WEEK IN WASHINGTON
The White House withdrew the nomination of E.J. Antoni to head the Bureau of Labor Statistics.
“The withdrawal comes after CNN’s KFile reported earlier this month that Antoni operated a since-deleted Twitter account that featured sexually degrading attacks on Kamala Harris, derogatory remarks about gay people, conspiracy theories, and crude insults aimed at critics of President Donald Trump. Staying Classy
Defense Secretary Pete Hegseth summoned the nation’s most seasoned military commanders to Quantico for a speech:
“Hegseth — who served as an infantry officer in the U.S. Army National Guard and was deployed to Guantanamo Bay, Iraq and Afghanistan — issued new directives that will raise physical standards for everyone in uniform to a ‘male level,’ toughen grooming standards, lift restrictions on rules of engagement, do away with racial quotas, and end restrictions on hazing for boot camp recruits.”
The Democrats are trying to claw back some of the healthcare cuts in the “Big Beautiful Bill” and the Republicans want nothing to do with that.
“The federal government ran out of money after a Democratic-backed spending bill that would have extended health care subsidies under the Affordable Care Act and reversed cuts to Medicaid failed, as well as the GOP-backed stopgap funding measure that would have funded the government for seven weeks also failed.” WORSE than WATCHING SAUAGE being MADE
Any number of government reports on the health of the economy will be delayed, and data collection is suspended. As if the Fed’s job was not hard enough. “Jobs Friday” came and went without a jobs report. But other private sources show the employment picture weakening. The next big number comes at the end of the month: the U.S. Personal Consumption Expenditure Index. So, the Fed is relying on other instruments to measure the health of the economy and inflation. Does this mean they will cut or maintain short-term rates to be safe?
One question has been bounced back and forth: should the Democrats fight this battle or do nothing and wait? Politically speaking, is it better to let Americans feel the pain?
“For instance, a family of four making $130,000 could see their monthly insurance premiums nearly double to $1,716 from $921, according to a calculator by KFF.
“Those price hikes would cause more than four million Americans to lose their insurance by 2034, according to an analysis by the Congressional Budget Office earlier this year.” We would rather watch sausage being made!
Let’s try this AI stuff again. We asked an AI-assisted search engine (Gemini), “What federal funding programs were canceled last week?” The response is below:
Due to a federal government shutdown that began on October 1, 2025, the Trump administration announced the cancellation of billions of dollars in federal funding and projects.
The cuts targeted clean energy and infrastructure projects in states that voted for the Democratic ticket in the 2024 presidential election.
Cancellations and freezes announced last week (September 28–October 4, 2025) include:
Energy Projects: The Department of Energy terminated over 300 financial awards for clean energy and grid modernization projects, resulting in an estimated savings of $7.56 billion. Impacted projects included hydrogen hubs, carbon-capture efforts, battery plants, and other clean energy initiatives, primarily in Democratic-leaning states.
Infrastructure Projects: The administration froze $18 billion in infrastructure funding for New York
Special Education Grants: The Department of Education canceled over $30 million in grants for special education teacher training, targeting programs that reference diversity, equity, and inclusion.
Public Broadcasting: Funding cuts hit home for public broadcasters, leading to the cancellation of some local public affairs shows.
Higher Education: In addition to the cuts announced in September, the administration requested an agreement from nine universities to freeze tuition for five years in exchange for federal funds.
Learning from our last AI encounter, we traced the energy projects to a New York Times article which stated $7.5 billion in cuts. We traced the infrastructure cuts to an NBC news article. We traced the special education cuts to an Education Week article. We traced the NPR funding cuts to a CNN article. And finally the higher education deal and cuts were traced to a U.S. News & World Report article. So, we’d say it worked this time.
Most of the cuts seem to be aimed at Democrats or Democratic priorities, which Trump himself said were the target. Conclusion: we would rather watch sausage being made!
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of Oct. 3 at 2.28%, 6 basis points lower than the previous week. The 10-year Breakeven Inflation Rate finished the period at 2.33%, 5 basis points lower than last week's observation.
MUNICIPAL CREDIT
The 10-year quality credit spread between BBB revenue less AAA general obligation bonds for last week was at 0.91% versus a historical average of 1.68%, demonstrating very healthy and tight spread metrics.
TAXABLE CREDIT
Investment grade spreads are extremely tight at 0.91%, compared to a historical average of 1.57%. The high-yield spread is lower at 2.61%, compared to a historical average of 4.57%. We believe that both these markets are overpriced on a spread basis.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Money market fund flows were largely up last week.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were mixed from the prior week.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced increased cash flows for the last reported period.
SUPPLY OF NEW ISSUE BONDS
This week’s tax-exempt market is expected to be higher at approximately $12+ billion.
CONCLUSION
Well, the government shutdown makes it harder to invest in the fixed-income markets (although the stock markets do not seem to care). Given all the possible outcomes, we are maintaining our neutral duration outlook. We realize this may hurt our performance comparisons to our benchmarks, whose durations are lengthening given the increased new-issue supply. We are also maintaining our overweight to the shorter end of our SMA’s investment universes. In each market (taxable or tax-exempt), an investor is earning between 77% to 79% of a ten-year securities income with a five-year security and only taking on 59% of the duration. What a value!
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