--- title: Elections Loom description: An in-depth review of the recent economic trends and potential challenges ahead. Explore the steepening Treasury curve, inflation concerns, municipal bond market dynamics, and the impact of political events on the economy. Gain valuable insights into what could go wrong and how it may affect your investments. 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- Fed week with a high probability of a hawkish hold - Inflation and Growth both look strong - The Iran war has been ongoing for the last eight months --- ## A CITY DIFFERENT TAKE This week is a ‘Fed week’. We expect the Federal Reserve to hold rates steady at this meeting. Markets are giving it only a 10% probability of a rate hike. However, the nature of the hold is not dovish. Fed speakers have been nearly unanimous that further tightening is coming. The markets have raised the probability of a December hike to 75%. Dallas Fed president Lorie Logan is calling for a 50-basis-point more tightening. For this week's meeting, we think most Fed members will signal patience rather than urgency about a rate hike. We will focus on the tone. Price pressures are still building in the economy. PMI is the highest since August 2022. Beth Hammack of the Cleveland Fed has described the pressures as broad-based and not just related to energy. However, energy has been the biggest swing factor. Brent crude has been in triple digits this summer and is now heading into fall. Brent has been up by more than 80% this year. Headline CPI is tracking to a 5% annualized pace this quarter, and September PCE is expected at 0.30% for the month or 3.1% year over year. We would need to see a sustained pullback in oil based on a truce in the Persian Gulf for inflation to come down. The other aspect of inflation has been growth. Early fourth-quarter data are strong. Hiring signals have been firm. We will see the release of third-quarter GDP growth data, which is expected to be 3.5%. ---  THE TREASURY MARKET Bills and the 2-year stayed anchored ahead of this week’s FOMC, and the buying showed up in the long end. That fits a flight-to-quality, stress in European sovereigns pushed global money toward Treasuries, and investors stepped in to lock in yields near 5% rather than fight the inflation-and-supply narrative. The rally compressed the term premium more than it changed the rate path. The 2s10s spread flattened from 37 basis points (10/19) to 31 basis points (10/23) last week. **US Treasury Actives Curve, week of 10/19 to 10/23/26**![Screenshot 2026-10-26 at 9.09.58 AM](https://blog.citydifferentinvestments.com/hs-fs/hubfs/Screenshot%202026-10-26%20at%209.09.58%20AM.png?width=600&height=309&name=Screenshot%202026-10-26%20at%209.09.58%20AM.png)   ---  THE MUNICIPAL MARKET A broad, parallel rally through 15 years. Yields fell roughly 22 to 24 bp from 1 year out to 15 years, so the front end and belly moved together, and 2s10s barely changed. **2s10s spread:** 64.6 bp, up from 63.7 bp on 10/19. Essentially flat, +0.9 bp. **BVAL Muni AAA Curve, week of 10/19 to 10/23/26![Screenshot 2026-10-26 at 9.15.13 AM](https://blog.citydifferentinvestments.com/hs-fs/hubfs/Screenshot%202026-10-26%20at%209.15.13%20AM.png?width=600&height=237&name=Screenshot%202026-10-26%20at%209.15.13%20AM.png)** Munis outperformed meaningfully, rallying 22 to 24 bp through 15 years against 9 to 15 bp for Treasuries. ![Screenshot 2026-10-26 at 9.16.22 AM](https://blog.citydifferentinvestments.com/hs-fs/hubfs/Screenshot%202026-10-26%20at%209.16.22%20AM.png?width=600&height=197&name=Screenshot%202026-10-26%20at%209.16.22%20AM.png)   ---  THE CORPORATE MARKET The credit markets have been orderly this month. Spread widening in names and sectors has been identifiable and for good reasons. The Bloomberg US Corporate Index option-adjusted spread was 89 basis points last week, down from its March peak of 93 basis points earlier this year. Similarly, CDX (protection) for investment-grade is currently at 63 basis points, versus a high of 68 basis points in March. The rates market for corporates rallied with Treasuries and followed the same curve flattening. **USD Corporate IG BVAL Curve, week of 10/19 to 10/23/26**![Screenshot 2026-10-26 at 9.17.24 AM](https://blog.citydifferentinvestments.com/hs-fs/hubfs/Screenshot%202026-10-26%20at%209.17.24%20AM.png?width=600&height=349&name=Screenshot%202026-10-26%20at%209.17.24%20AM.png) ---  THIS WEEK IN WASHINGTON The war with Iran has been ongoing for eight months. President Trump has hinted that strikes will resume after the November 3 midterms. The US has sent a third carrier strike group and 10,000 additional sailors and Marines toward the Persian Gulf. Defense Secretary Hegseth made an unannounced stop in Israel ahead of Netanyahu’s reelection vote on Tuesday. After Houthi drones and missiles hit Riyadh’s airport and energy facilities, the State Department pulled some diplomats out of Saudi Arabia. Iran is bracing for a new bombing campaign and preparing to retaliate across the region, including against Israel and the UAE. Politics sits at the center of this. About two-thirds of Americans disapprove of how the war has been handled, according to Pew. High fuel prices are weighing on Republicans heading into the midterms. Some analysts think renewed fighting could serve both leaders politically. If Netanyahu loses on Tuesday, his main rival, Gadi Eisenkot, may be less eager to restart the war. --- ## CONCLUSION Consumer Price Index for September rose at the fastest pace this year. Americans are feeling the effects of price increases in both Gasoline and Groceries, which are hot-button topics in this midterm election. The Federal Reserve delivered a rate hike in September. However, the key language is that they signaled that the Fed has time to weigh incoming data. We are back at a Fed week this week, but the probability of a rate hike is very low. ---   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. 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