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WEEK ENDING 10/17/2025
- What is a “Minsky moment?”
- The government shutdown continues
- Chair Powell states employment growth has slowed
- 100% tariffs on China one day; but not sustainable the next (did anybody order TACOs?)
- Credit problems at regional banks; Jamie Dimon sees a cockroach
A CITY DIFFERENT TAKE
We thought that this would be a data-light weekly summary to pen. Oh boy, were we wrong!
Let’s start by defining an economic hypothesis coined by economist Hyman Minsky — a “Minsky moment.” Wikipedia defines it as:
“A Minsky moment is a sudden, major collapse of asset values which marks the end of the growth phase of a cycle in credit markets or business activity.
Keep that definition in mind. We will touch on it later.
Jerome Powell in a Philadelphia speech said:
"Based on the data that we do have, it is fair to say that the outlook for employment and inflation does not appear to have changed much since our September meeting four weeks ago," at which the Fed cut its benchmark interest rate by a quarter of a percentage point, Powell said. "Data available prior to the shutdown, however, show that growth in economic activity may be on a somewhat firmer trajectory than expected."
His remarks did not change the near unanimous consensus among investors that the Fed would cut its policy rate by another quarter of a percentage point in two weeks.” Powell's Philly Speech
Chair Powell has estimated that the U.S. economy needs to create 50,000 jobs per month to maintain current employment levels. Needed Job Growth The fixed-income market seems to be overly optimistic in its implied probabilities of an October rate cut. As of the morning of Oct. 17 that implied probability stood at 101.0%, and 105.1% for a Dec. 10 rate cut.
President Trump proposed 100% tariffs on Chinese goods after China imposed restrictions on rare earth minerals, but then quickly hedged his comments. (Who ordered “TACOs?”)
“U.S. President Donald Trump said his proposed 100% tariff on goods from China would not be sustainable, but blamed Beijing for the latest impasse in trade talks that began with Chinese authorities tightening control over rare earth exports.
Asked whether such a high tariff was sustainable and what that might do to the economy, Trump replied, "It's not sustainable, but that's what the number is." (Reuters)
The Fed’s beige book was released this week, categorizing the economy as having “changed little,” but stated:
“Prices rose further during the reporting period,” the report stated. “Tariff-induced input cost increases were reported across many Districts, but the extent of those higher costs passing through to final prices varied.” Fed's Conundrum
On Thursday, two regional banks reported credit problems and associated losses on their lending books:
“New worries about loans by regional banks are sinking stocks as investors fear there’s a bumpy road ahead for credit markets. It comes after the bankruptcies of two auto-industry companies last month turned up the pressure on the banking industry.
The CEO of the biggest U.S. bank, JPMorgan’s Jamie Dimon, raised the issue of those bankruptcies — of subprime auto lender Tricolor Holdings and auto parts maker First Brands — this week, referring to credit market risk when he made the comment “when you see one cockroach, there’s probably more.” Call the Orkin Man
Well, there you have it. In a week devoid of government data, the news filled the void.
CHANGES IN RATES
Treasury Market
Treasury rates moved lower on the week. The 2/10-year spread lowered by 3 basis points to 53 basis points.
Municipal Market
Yield in the municipal market moved lower for maturities three years and longer. For the week ending Oct. 17, the municipal general obligation AAA yield curve flattened considerably, moving from +0.52% to +0.41%.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
Treasury-muni ratios were cheaper for shorter maturities and richer for maturities of ten years and longer.
Investment Grade Corporates
Investment grade corporate bond yields moved slightly lower week over week.
THIS WEEK IN WASHINGTON
The government shutdown continues with no signs of a resolution (but that changes day to day).
The administration marked a win in the Gaza conflict with the remaining live hostages being freed. That was phase one, phase two looks more difficult.
John Bolton pleaded not guilty to the Justice Department’s charges of mishandling information. And on Friday, George Santos learned from his prison television that President Trump commuted his sentence. Go Figure!
Saturday’s No Kings Day rallies were described by Speaker of the House Mike Johnson as:
“Speaker Mike Johnson called it a “hate-America rally” that will draw “the pro-Hamas wing” of the Democratic Party and “the antifa people.” House Republican Whip Tom Emmer claimed that “you’ll see the hate for America all over this thing when they show up” for the rally. Sen. Roger Marshall claimed protesters were being paid and suggested the National Guard might need to show up.”
Not to be outdone, Texas Governor Gregg Abbott deployed Texas National Guard units to Austin for the rally:
“Abbott, in a press release, said he’s directing the Texas Department of Public Safety to activate the Texas National Guard because of a “planned antifa-linked demonstration.”
“Today, I directed the Texas Department of Public Safety and Texas National Guard to deploy all necessary law enforcement officials and resources to ensure the safety of Austin residents,” Abbott said. “Texas will deter criminal mischief and work with local law enforcement to arrest anyone engaging in acts of violence or damaging property.” Escalation
The escalation in rhetoric is striking.
As of Sunday morning, the rallies seemed to go off without a hint of violence. Seven million Americans joined in these demonstrations. June’s “No Kings” protests drew an estimated five million participants.
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of Oct. 10 at 2.25%, 3 basis points lower than the previous week. The 10-year Breakeven Inflation Rate finished the period at 2.30%, 3 basis points lower than last week's observation.
MUNICIPAL CREDIT
Last week's 10-year quality credit spread between BBB revenue and AAA general obligation bonds was at 0.81% versus a historical average of 1.68%, demonstrating very healthy and tight spread metrics.
TAXABLE CREDIT
Credit market turmoil is starting to reveal itself on Thursday:
“Regional banks came under renewed scrutiny after Zions Bancorp said it would take a large loss and revealed accusations of fraud against a set of borrowers who had ties to a number of other lenders in the industry.
“The disclosures helped send bank stocks reeling to their worst day since President Trump’s tariffs hammered the market in April, evidence of how on edge Wall Street is after the recent high-profile bankruptcies of auto supplier First Brands and auto lender Tricolor.
“It wasn’t clear how widespread any pain would be from the new allegations, which center on a set of investment funds that are now being sued by several banks.”
To follow this up:
“Phoenix-based Western Alliance Bancorp WAL 1.85%increase; green up pointing triangle is seeking to recover roughly $100 million from Cantor Group V, an entity managed by the same leadership team, according to Zions’s lawsuit.” Regional Bank Stocks Under Pressure
The fact that these risks are surfacing should not be a surprise to anyone. Stuff like this happens and the banks are claiming that fraud was involved. We would too. Fraud cannot be analyzed but loose lending standards can lead to these types of events and are the responsibility of the lending institution. You be the judge.
At any rate we have long felt that the narrowness in credit spreads does not warrant taking these credit risks!
Investment grade spreads are tight at 1.00%, 3 basis points wider than last week. This is still very tight compared to a historical average of 1.57%. The high-yield spread is lower at 2.87%, compared to a historical average of 4.57%. We believe that both these markets are overpriced on a spread basis. The latest credit tumult has not been represented in the current credit spreads.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Money market fund flows were down in total last week, led by the government category.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were mixed from the prior week.
ETF Fund Flows (millions of dollars)
ETFs were positive over the week.
SUPPLY OF NEW ISSUE BONDS
This week’s tax-exempt market is expected to reach approximately $14 billion, in line with the generally higher issuances we’ve seen as of late.
CONCLUSION
The municipal supply onslaught continues and is the major force behind the municipal market’s underperformance. The Bloomberg U.S. Agg Index had 7.23% positive price performance for the YTD ending period Oct. 17, versus 3.69% positive price performance of the Bloomberg U.S. Municipal Index. The municipal yield curve has flattened over the week, which is in contrast with the taxable market’s somewhat stable 2/10 spread. There have been some credit questions raised in the taxable market, although credit spreads seem unaffected as of yet.
We are maintaining our neutral duration positioning and remain overweighted to the short end of our SMA’s investment universe. An investor still earns 90% of the income of a ten-year Treasury by buying a five-year Treasury with about half the duration risk. In the municipal market, that ratio is 81%. We do not think that current yield spreads pay investors for credit risk and are maintaining higher overall credit quality. The early cracks in the credit markets experienced in the taxable market have not surfaced in the municipal market as of yet.
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