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WEEK ENDING 11/14/2025
- The government reopens, ending longest shutdown in US history. Let the data flow, even if it is delayed.
- Fed’s bulls and bears line up for spirited debate about their next move. Will the lack of data influence the Fed one way or another?
- With the government up and running, Congress can concentrate on other matters — like what could go wrong before the midterms?
A CITY DIFFERENT TAKE
The government is now open. Some pundits thought the Democrats folded, but we are not so sure. Yes, government workers will receive back pay, will not be laid off, and hopefully, Thanksgiving travel will return to “normal” before the holidays. However, health care costs were not addressed, and voters will still receive their increases. Which party should that help?
Now to the Federal Reserve. As we have said before, the Fed’s dual mandate has put the Fed between a rock and a hard place. Should it be worried about the employment picture? Private data has given markets a peek into the overall jobs picture. The Nov. 5 ADP release shows the economy added 42,000 private jobs in October, beating estimates of a 30,000 increase. The September report was revised up by 3,000 jobs to a 29,000 decrease. Troubling, however, is a new ADP report that shows weekly job declines of 11,250 a week in the four weeks through Oct. 25.
“Payrolls firm ADP estimated that the private sector was shedding 11,250 jobs a week in the four weeks through Oct. 25.
“The figure is the latest number in a new weekly ADP data series that estimates changes in private-sector employment over the preceding month.
“Last week, in a separate data series, ADP estimated that the private sector added 42,000 jobs in October. That figure uses a different methodology intended to replicate the government’s monthly jobs report more closely.
“Economic statistics from alternative sources like ADP’s have taken on greater weight during the government shutdown, which has delayed the release of the official numbers.” A murky Jobs Picture at Best
On the inflation front, there is really no substitute for the government data, so those Fed officials concerned about inflation are flying blind. This is the background for the next Fed meeting.
“Officials are fractured over which poses the greater threat—persistent inflation or a sluggish labor market—and even a resumption of official economic data may not bridge the differences.
“But a contingent of hawks questioned the need for further reductions. Their resistance hardened after officials reduced rates again in late October to the current range between 3.75% and 4%. The debate over what to do in December was especially contentious, with hawks forcefully challenging the presumption of a third cut, according to public comments and recent interviews.” Fed Debate
The market implied probabilities of future Fed rate cuts reflect this uncertainty:
What we see from the above table is that the implied probability of a December rate cut has significantly decreased. We included the July 17 meeting probabilities because that is the first Fed meeting with a new chair.
Adding to the debate and supporting the K-shaped economy are reports like these on CNN:
“The percentage of subprime borrowers – those with credit scores below 670 – who are at least 60 days late on their car loans has doubled since 2021 to 6.43%, according to Fitch Ratings. That’s worse than during the past three recessions – during the Covid pandemic, the Great Recession or the dot-com bust.” Sub-Prime Auto Loan showing signs of distress
Auto loans are not alone:
“According to data from the Federal Reserve Bank of Philadelphia, 0.90% of accounts were delinquent, the most since the Fed bank began its report. It’s only a slight increase from the 0.89% in the fourth quarter of 2023, but a larger spike from the 0.70% seen in 2022.” Some Credit Card Distress
CHANGES IN RATES
Treasury Market
Treasury rates increased over the week. The 2/10-year slope ended the week at 52 basis points, 4 basis points flatter than the week before.
Municipal Market
Yields in the municipal market stayed close to unchanged on the week. The 2/10 slope ended the week at 24 basis points, unchanged from the prior week.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
Treasury-muni ratios were slightly lower across the yield curve.
Investment Grade Corporates
Investment grade corporate bond yields moved higher week over week for the longer tenors.
THIS WEEK IN WASHINGTON
Aside from the end of the government shutdown and the Fed debate, the next interesting moment from last week was the belated swearing in of Rep. Adelita Grijalva (D–Arizona). The debate in the House has turned to the Epstein files, with the atmosphere being peppered with the congressional release of electronic communications from the Epstein estate. This debate around such horrific crimes looks to take up much of Washington’s time and airspace.
There is other news on the “affordability” front. On Friday, the president decided to roll back some tariffs:
“WASHINGTON, Nov 14 (Reuters) - U.S. President Donald Trump on Friday rolled back tariffs on more than 200 food products, including such staples as coffee, beef, bananas and orange juice, in the face of growing angst among American consumers about the high cost of groceries.
The new exemptions - which took effect retroactively at midnight on Thursday - mark a sharp reversal for Trump, who has long insisted that the sweeping import duties he imposed earlier this year are not fueling inflation.
"They may in some cases" raise prices, Trump said of his tariffs when asked about the move aboard Air Force One on Friday evening. But he insisted that overall, the U.S. has "virtually no inflation." Magical Thinking
Let’s pursue this line of thinking:
- If tariffs are broad based… (CDI thinks they are)
- And are not paid by U.S. consumers… (not CDI’s conclusion)
- And there is “virtually no inflation”…
- Then why do some tariffs need to be rolled back?
We are simple bond folk, but something is amiss. We may be accused of being too political, but we’re certainly not brain-dead!
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of Nov. 14 at 2.18%, 2 basis points lower than the previous week. The 10-year Breakeven Inflation Rate finished the period at 2.28%, unchanged from last week's observation. The government shutdown prevents us from updating the above graph.
MUNICIPAL CREDIT
Last week's 10-year quality credit spread between BBB revenue bonds and AAA general obligation bonds was 0.89%, compared to a historical average of 1.68%, demonstrating very healthy and tight spread metrics.
TAXABLE CREDIT
Investment grade spreads are tight at 1.02%, 6 basis points higher than last week. This is still very tight compared to a historical average of 1.57%. The high-yield spread is lower at 2.81%, compared to a historical average of 4.56%. 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 up in total last week in all categories except Prime.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were a net positive compared to the prior week. Municipal bond funds were the big winners on the week.
ETF Fund Flows (millions of dollars)
ETF flows were mixed over the week.
SUPPLY OF NEW ISSUE BONDS
This is a holiday week with a projected $9 to $13 billion in municipal supply over the next two weeks, leading up to the Thanksgiving holiday.
CONCLUSION
The government shutdown is over. However, it remains to be seen how long and smoothly the reopening will proceed. There looks to be significant debate at the Fed about its next move on the short-term interest rate front. Employment and the economy look to be suffering (at least from a private employment data and sub-prime loan standpoint). The Fed and most investors are flying blind on the inflation front; government data is considered the gold standard and is not available. The holiday season is approaching, and the likelihood of a surprise announcement is high. In light of this, we will maintain our neutral duration outlook with a focus on the short end of each strategy’s investment universe, along with a focus on higher credit quality.
IMPORTANT DISCLOSURES
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