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WEEK ENDING 1/9/2026
- Through the prism of jobs, the economy doesn’t look so bad
- Has the “lame duck” phase of this administration begun?
- A strategy transition point may be approaching
A CITY DIFFERENT TAKE
Welcome to the new year. As we enter 2026, the fog surrounding the government data delays produced by the shutdown is beginning to lift. What we see is a jobs picture that is slowing but not as bad as some of the news outlets reported during the shutdown and shortly thereafter. This all became clearer on Friday with the release of a plethora of data. The table below summarizes a sampling of these releases:
The long and short of it is that the economy, as seen through the prism of the jobs market, looks generally OK. The Atlanta Fed (GDPNOW) Jan. 8 fourth-quarter GDP estimate was 5.4%. The jobs market is not as robust as in earlier periods and looks to be slowing at a moderate pace. This all comes together to make the Fed’s job even harder. A significantly slower jobs market would have put more pressure on the Fed to cut short-term rates. Now, not so much. The Fed’s chairmanship turns over in May of 2026. The market-implied probability of a 0.25% rate cut in the federal funds rate at one of the first three meetings of 2026 is between 5.0% and 28.0%. The implied probability of a 0.25% rate cut at the June 17 meeting is 51.4%.
The market’s attention will now turn to inflation, the other part of the Fed’s mandate. Our first glimpse of the inflation picture will come on Jan. 13 with the release of the CPI data. To quote “Jurassic Park” and Samuel L. Jackson, “Hold on to your butts.”
TreasuryMarket
It has been a quiet couple of weeks in the Treasury, at least judging from the period-to-period yield changes. The Treasury yields were virtually unchanged marginally across all tenors. The 2/10 spread is flattened to 64 from 68 basis points for the period. The Treasury market delayed data releases are starting to straighten out.
Municipal Market
The municipal market was more active over the period as the “January Effect” seems to be taking place. The 2/10 slope was 29 basis points at the beginning of the period and ended at 0.31 basis points, which is still very flat (the long-term average is 1.49%).
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
Treasury-muni ratios were lower across the yield curve because of a the “January Effect.”
Investment Grade Corporates
Investment-grade corporate bond yields moved marginally lower over the period.
THIS WEEK IN WASHINGTON
The headlines out of Washington have not been great to start the new year. To list them is quite distressing, but they seem to add up to an early start of the “lame duck” phase of the second Trump administration.
One piece of economic news is captured by the Wall Street Journal headline, “Trump Calls on Fannie and Freddie to Buy $200 Billion in Mortgage Bonds”. A Drop in the Mortgage Bucket. The strategy is an attempt to make homeownership more affordable. The impact on mortgage rates has been estimated to be a 0.25% reduction in the general level of mortgage rates. The $200 billion is about 1.5% of the $13.07 trillion mortgage market, or about half of the 2008–09 Fannie and Freddie balance sheet exposure to mortgage bonds or double the limits prior to the announcement.
It certainly seems that we are hearing what Samuel Clemens called “the rhyme of history.” We have worried about this rhyme for a while — see our blog, “Other Signs of the Apocalypse” The Rhyme of History.
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of Jan. 9 at 2.32%, 5 basis points higher than the Dec. 19 close. The 10-year Breakeven Inflation Rate finished the period at 2.28%, 4 basis points higher than the last observation on Dec. 19. We begin to get our first inflation reads next week with the CPI release.
MUNICIPAL CREDIT
Last week's 10-year quality credit spread between BBB revenue bonds and AAA general obligation bonds was 0.96%, 12 basis points wider than the Dec. 19 observation, compared to a historical average of 1.68%, demonstrating a very healthy and tight spread. If these spreads were to revert to their average (assuming a seven-year duration), an investor would lose approximately five years of the additional income the 10-year BBB credit paid out.
TAXABLE CREDIT
Investment-grade spreads were lower as of Jan. 9 at 0.99%, 3 basis points lower than the Dec. 19 observation. The long-term average is 1.57%. If these spreads were to revert to their average (assuming a five-year duration), an investor would lose approximately three years of the additional income the BBB credit paid out. The high-yield spread is lower at 2.41%, compared to a historical average of 4.55%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Money market fund flows were higher for the period.
Mutual Fund Flows (millions of dollars)
Mutual fund flows in total were up compared to the prior week measured.
ETF Fund Flows (millions of dollars)
Net ETF flows were higher for the period.
SUPPLY OF NEW ISSUE BONDS
Supply of newly issued municipal bond is expected to be seasonally high this upcoming week at approximately $9.3 B.
CONCLUSION
The jobs market is slowing, but the situation is not as dire as some of the talking heads would have you believe. Context is important. The current state of the jobs market makes it hard for the Fed to cut short-term rates. This heightens the importance of the inflation readings, which start this week.
It seems that the administration is entering the “lame duck” phase of its second term. Cracks in the Republican support for the administration’s initiatives are showing in both the House and the Senate.
We are still maintaining our neutral duration stance and focus on the shorter end of our SMA’s investment universes — although the data is leading us to suspect a transition might be at hand shortly. We will keep all our readers informed when we reach that point.
IMPORTANT DISCLOSURES
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