WEEK ENDING 9/18/2026
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- Fed raises the Fed Funds rate by 0.25%
- Not much week-over-week reaction in the fixed income markets
- Another trade war, “elbows up”
A CITY DIFFERENT TAKE
The elephant in the room this week is the latest Fed action. The Fed raised the Fed Funds rate by 0.25% at its meeting on Wednesday. This move was highly anticipated by the fixed-income market participants. On 9/11/2026, the market-implied probability of a 0.25% increase in the Fed Funds rate was 88.1%. By 9/15/2026, that probability increased to 91.5%. We thought the Fed would raise the rate by 0.25% and wait until the December meeting to raise it again, so as not to be accused of influencing the mid-term election. As you can see from the implied probabilities, we did not go far out on that branch.
Chair Warsh followed through on his hawkish Jackson Hole statements, noting a stable economy and unacceptably high inflation relative to the Fed’s 2.00% target. What is driving higher inflation numbers? We see several factors: the Iran conflict driving higher energy prices, tariff policies, a $40 (T) national debt (both parties are responsible for this one), debt financing potential of the AI buildout, and a loss of stature for the US on the international stage (it’s tough to be a weak bully).
The US/Canada trade war is a perfect example of the weak-bully phenomenon.
“Some numbers make you sit up straight. I did just that when I read a poll earlier this month showing that 41 percent of Canadians see the United States as “an enemy country.”
The poll was conducted right after President Donald Trump slapped 50 percent tariffs on $27.6 billion of Canadian exports to the United States. Just days earlier, Trump had announced on Truth Social that “Canada and the U.S.A., subject to the finalization of documents, have a [trade] DEAL!” But the deal fell apart at the last minute. Canadian Prime Minister Mark Carney responded by quickly matching the U.S. tariffs with Canadian tariffs on U.S. goods.” Another Trade War
Chris’ father would tell him that when confronted by a bully, punch them in the face. You may take a beating, but odds are it will only be one. Canadian Prime Minister Mark Carney put it another way, “elbows up.”
THE TREASURY MARKET
Week over week, Treasury yields are higher by 5 to 10 basis points for maturities from 1 to 10 years. 30-year rates were largely unchanged. Not much of a move given the latest Fed action. What can the casual observer gleam from this? As we alluded to earlier, the market anticipated this move. Media pundits have been highlighting the rise in interest rates over the last couple of weeks, with much emphasis in their delivery. We believe this rise in interest rates is a natural occurrence given the factors we listed above. We note that this increase in rates has been orderly. Other elements of note: the slope of the Treasury curve flattened by 0.08% for the week, not an unreasonable occurrence given the Fed’s action. The 2-10-year spread stands at 0.25% on Friday’s close versus 0.33% last week.
Credit spreads in the taxable market were flat to slightly narrower. AAA to BBB spreads went from 0.73% to 0.67%. This is not that strange because, in a rising-rate environment, higher-quality yields react first until lower-quality trading establishes new spread levels.
What did investors do with their cash? On the mutual fund side, investors withdrew $738 from taxable funds during the period between 9/2/2026 and 9/9/2026. The most significant coming out of government and investment-grade funds. High-yield funds saw positive cash flows for the same period.
THE MUNICIPAL MARKET
Interest rates in the municipal market were higher week over week, ranging from 0.02% for 30-year AAA general obligation bonds to 0.18% for 1-year AAA general obligation bonds. The yield ratios for municipals versus their Treasury equivalents have moved back into the far territory after spending several weeks in what CDI would categorize as the rich territory. 5-year municipal AAA general obligation bonds are yielding 66.3% of their Treasury equivalents, and 10-year municipals are yielding 74.3% of their Treasury equivalents. Both exceed the breakeven rate given a 37% top federal income tax rate.
Quality spreads in the municipal market have been largely unchanged week over week. The slope of the municipal AAA general obligation yield curve also flattened, to our surprise. The slope of the 2–10-year AAA general obligation bonds was 0.91% at the close of business on 9/11/2026 versus 0.79% at the close of business on 9/18/2026.
THE CORPORATE MARKET
Corporate bond yields moved higher on the week, largely shadowing the rate changes in the Treasury market.
THIS WEEK IN WASHINGTON
Washington, D.C., always surprises. The imbroglio over the Kennedy Center is still in the news. Probably more important, the Trump administration will try to enforce a ban barring journalists from CNN, MS NOW, and Politico from entering the White House. Does anyone else feel the Founding Fathers rolling over in their graves? The House of Representatives is leaving Washington, D.C. early:
“House members will leave Washington on Wednesday night for the last time before the November midterm elections, after GOP leaders said they were canceling votes set for Thursday.
The change in schedule means that the House won’t vote on Republican Rep. Thomas Massie of Kentucky’s resolution to impeach Defense Secretary Pete Hegseth until after Election Day.” Run Away!
We suspect that is because House republicans want to get home early to interact with their constituents 😊.
CONCLUSION
The Fed action and the move in interest rates have media pundits and some investors “lighting their hair on fire”. CDI’s fixed-income team has experienced several significant blow-ups in the fixed-income markets dating back to 1987. At this point, we view this rise in rates as a natural occurrence given the current inflationary picture. The increase has been orderly! That is not to say that some extraneous shock could change our opinion, e.g., a blow-up in the AI buildout. We will stay observant. Fixed-income securities look fairly priced across most segments. Who doesn’t like buying stuff on sale!
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