WEEK ENDING 6/27/2025
● US completes successful bombing raid against Iran; original damage estimates vary
● Sticks and stones won’t lower rates
● Everyone’s hat into the Fed Chair ring?
● Who’s your daddy?
● Happy Fourth of July
A CITY DIFFERENT TAKE
After the completion of successful bombing raids on three of Iran’s nuclear facilities, the price of oil spiked and it looked like U.S. equity markets would suffer disruptions. Markets seemed to have calmed down on Monday and the announcement of a ceasefire (though tenuous) added to this confidence.
Preliminary damage reports varied from the president’s initial report of an “obliterated” nuclear program to the Pentagon’s assessment of an “evolving picture.” Damage Reports
In his latest book, “Conquering Crisis,” Admiral William H. McRaven (whose final military assignment was commander of all U.S. Special Operations Forces) wrote, “First reports are always wrong.”
Federal Reserve Chair Jerome Powell testified before Congress this week while the president continued to criticize him:
“‘I think he’s terrible,’ Trump said when asked during a news conference about his intentions for the next Fed leader. Trump then called Powell a ‘very average mentally person,’ adding he has ‘a low IQ for what he does’ and is ‘a very political guy.’
“‘I think he is a very stupid person, actually,’ Trump said.” Sticks and Stones
In our estimation, Chair Powell has been an extremely consistent Federal Reserve Board Chair.
Meanwhile, the run to be the next Fed Chair is under way. Chair Powell’s term is up in May 2026. The Wall Street Journal published a list of contenders this week.
“Trump is considering former Fed governor Kevin Warsh and National Economic Council director Kevin Hassett, according to people familiar with the matter. Treasury Secretary Scott Bessent is being pitched to Trump by allies of both men as a potential candidate, some of these people said. Other contenders include former World Bank President David Malpass and Fed governor Christopher Waller.”
On the economic front, the latest inflation figures were released. Both nominal and core measures of U.S. Personnel Consumption Expenditures (PCE) were slightly above last month’s upwardly revised releases. Year-over-year PCE was at 2.3%, above last month’s 2.2%. The core measure of 2.7% was above last month’s reading of 2.6%. The debate continues if the impacts of trade policy are reflected in these readings. We think not. Both numbers still exceed the Fed’s 2.0% target.
CHANGES IN RATES
Yields in the Treasury market were lower week over week. Hints of support for cuts to Fed rates fueled more movement at the short end of the market. Currently the Treasury market is implying a 92% probability of a 0.25% short-term rate cut by Sept. 2025. The week prior, that probability stood at 65%. The slope of the Treasury yield curve (as measured by the 2-year/10-year slope) steepened over the week from 0.48% to 0.56%.
The municipal market saw a small rally throughout all tenors; supply concerns are still weighing on market participants.
The above ratios indicate that relative to the Treasury market the municipal market underperformed across all tenors.
Investment grade corporate bonds also moved lower in yields.
THIS WEEK IN WASHINGTON
The “Big Beautiful Bill” took one step closer to being returned to the House.
President Trump attended and really dominated the NATO summit. NATO members committed to increasing their defense spending from 2% of GDP to 3.5% by 2035.
There seems to be a budding bromance in the works between NATO Secretary General Mark Rutte and the president.
“As Trump compared the Middle Eastern adversaries to ‘two kids in a school yard’ who ‘fight like hell,’ Rutte interjected, laughing: ‘And then daddy has to sometimes use strong language to get them to stop.’” Who's Your Daddy?
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of June 27 at 2.31%, 2 basis points lower than last week. The 10-year Breakeven Inflation Rate finished the week at 2.29%, 1 basis point lower than the June 23 observation
MUNICIPAL CREDIT
As of June 27, 10-year quality spreads (AAA vs. BBB) were 6 basis points higher than the prior week at 0.97% (based on our calculations). The long-term average is 1.69%.
TAXABLE CREDIT
However, investment grade spreads are showing some movement at 1.00%. The high yield spread is lower at 2.83%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Overall, money market funds flows were up last week.
Mutual Fund Flows (millions of dollars)
Across the board, cash flows into bond mutual funds were down week over week.
ETF Fund Flows (millions of dollars)
ETF asset classes saw a positive outflow over the period.
SUPPLY OF NEW ISSUE BONDS
The supply of new municipal bond issues is expected to be closer to $2.5 billion this week. A slow holiday week before the $45 billion July reinvestment, looking for new bonds.
July new issuance of municipal bonds is estimated to be between $40 billion and $50 billion. This should be enough to manage reinvestment demand.
CONCLUSION
Hints of future Fed reductions of short-term rates and more “stability” in the Middle East set the stage for both positive moves in the equity and fixed income markets. The fight for the “Big Beautiful Bill” will grab all the headlines going into the Fourth of July holiday. It has been said that you really do not want to see the “sausage being made” when it comes to federal legislation. This is a prime example of that.
Happy Independence Day. We will be taking next week off and will see you back here the following week.
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