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WEEK ENDING 4/17/2026
- Open sesame: the Strait of Hormuz and the market’s magic phrase
- The Fed chair transition and what it means for rates
Note: Over the weekend, the U.S. seized an Iranian-flagged vessel by force in the Gulf of Oman. Iranian state TV reported that Tehran's negotiators have no plans to attend the next round of talks, despite JD Vance leading a U.S. delegation on Tuesday, and that the Strait of Hormuz is again effectively cut off to maritime traffic. Brent crude jumped as much as 7.9%, and U.S. stock futures sold off on the news.
The cautious tone reflected in this week's commentary, that we are treating recent developments as a pause in uncertainty, not a resolution, has proven prescient. What markets were searching for last week, a durable framework for peace and sustained energy price relief, remains elusive. Buckle up; the range of outcomes heading into next week is wider than ever.
A CITY DIFFERENT TAKE
Last week, the most consequential development came on Friday, when Iran's foreign minister confirmed that the Strait of Hormuz was open to commercial traffic following the 10-day ceasefire between Israel and Lebanon, sending Brent crude down sharply to around $90 per barrel. For bond markets, this matters enormously; energy price relief reduces the near-term stagflation risk that has kept the Fed anchored. That said, we remain cautious. Physical oil inventories have been drawn down aggressively, tanker traffic normalization will take weeks, and the ceasefire lacks a permanent framework. Talks are expected to resume, and any breakdown would push crude back toward levels that would reignite inflation concerns and pressure risk assets. We are treating this as a pause in uncertainty, not a resolution.
The physical reality lags the financial one. The U.S. Navy continued to advise ships to avoid the area even as social media posts declared the Strait open, and Reuters confirmed the naval blockade remains in place. Even in a best-case reopening scenario, it takes several weeks for tanker traffic to normalize and up to four months for most production to come back online. Downstream consequences are already being felt — the IEA's executive director warned that Europe could face jet-fuel shortages within six weeks, and mortgage rates spiked by 40 basis points in March, further pressuring housing affordability. The market is pricing in resolution; the physical economy is still waiting for it.
The labor market continues to project an image of stability that, on closer inspection, contains meaningful complexity beneath the surface. Initial jobless claims came in at just 207,000 mid-month, continuing claims remain near two-year lows, and ADP's four-week average private payroll growth was accelerating through the end of March. The unemployment rate sits at 4.2%, squarely within the FOMC's estimated range of the long-run neutral rate. The Beveridge curve — the relationship between unemployment and job vacancy rates — suggests that supply and demand are in relative balance. For the Fed's hawks, this is sufficient reason to keep inflation, not employment, as the dominant policy concern.
However, average hourly earnings growth is being distorted by the outsized share of job gains in healthcare, social assistance, and government sectors, which together account for nearly 75% of all job creation over the past two years and tend to skew toward lower-wage categories like senior care and home health. The Employment Cost Index, which controls composition effects, shows total compensation growth slowed from 5.3% in 2022 to 3.4% at the end of 2025, still above pre-pandemic norms, but clearly decelerating. Meanwhile, the labor force itself is shrinking relative to January 2025, as baby boomer retirements and immigration policy curbs reduce supply in step with weakening demand.
The bottom line for markets: real wage growth is barely positive after the energy price spike, consumer purchasing power is under quite a bit of pressure, and that dynamic — more than the unemployment rate alone — may ultimately be what tips the Fed toward acknowledging that the employment side of its mandate deserves more attention.
CHANGES IN RATES
TreasuryMarket
Treasury yields continued to rally lower. The 2/10 spread widened to approximately 54 basis points (from roughly 49 basis points a month ago), continuing a gradual bear steepening trend that has been building since the conflict began. This steepening is occurring in the front end of the market, which is pricing out energy shock and stagflation tail risk. But the long end is notably reluctant to participate.
The six-month Treasury at 3.668% and the one-year Treasury at 3.633% are both through the two-year Treasury at 3.709%, confirming that the curve remains inverted at the very front end despite the rally. This inversion is modest and narrowing, but it reinforces that the Fed is not yet able to cut. The market is pricing only about 15 basis points for easing by December, consistent with a single 25-basis-point cut at roughly 60% odds. That is not a rate-cut cycle; it is a market signaling that the Fed is on hold, with a modest optionality premium for easing if conditions deteriorate.
Municipal Market
The 2/10 spread for last week was 59 basis points, down from 62 basis points a week ago. The municipal market this week was shaped by two competing forces: a constructive technical backdrop driven by a large new-issue calendar, and a geopolitical relief rally that pulled rates lower across the board. The AAA muni curve rallied uniformly by approximately 5 basis points from the 2030 maturity out through 2056, with the very front end (three months through one year) moving only 1 to 2 basis points — tighter than Treasuries in the short end but broadly in sync in the intermediate and long end.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
The one-to-five-year ratios are really compressed and historically rich. Treasuries rallied harder than munis in the front end this week. The 10-year and the longer part of the muni curve are progressively improving for muni investors.
Investment Grade Corporates
The five-year was the standout, dropping 12 basis points on the week — the largest move on the curve and consistent with the belly-led Treasury rally we saw simultaneously. The one-year and 10-year fell 8 to 9 basis points in lockstep, while the 30-year lagged at just 5 basis points, mirroring the Treasury long end's reluctance to fully participate in the relief trade.
THIS WEEK IN WASHINGTON
Washington delivered a full plate this week across geopolitics, monetary policy, and fiscal legislation. The most market-moving development was the progress — however fragile — toward a U.S.-Iran ceasefire and the reopening of the Strait of Hormuz, which sent Treasury yields lower across the curve and triggered a broad risk-on rally in equities and credit. President Trump told Bloomberg that Iran had agreed to suspend its nuclear program indefinitely and that most of the main points of a deal were finalized, though Tehran quickly pushed back on key specifics, including the disposition of its enriched uranium stockpile. The naval blockade of Iranian ports remains in place, and Iran's parliamentary speaker warned directly that the Strait would close again if the blockade continued. The ceasefire framework is real, but the distance between Washington's characterization of the deal and Tehran's is wide enough to keep uncertainty elevated heading into next week.
The confirmation hearing for Fed chair nominee Kevin Warsh, scheduled for Tuesday before the Senate Banking Committee, is the single most important Washington event for fixed-income investors in the near term. Warsh has been a vocal advocate for rate cuts, but that position will face pointed questioning given that inflation remains stubbornly above target. (February core PCE came in at approximately 3.0% year-over-year.) The broader complication is that Senator Tillis has pledged to block confirmation until the DOJ drops its investigation of Chair Powell, while Trump has indicated the investigation should continue. If this standoff is unresolved by May 15 (when Powell's term expires), fixed-income markets will face an unprecedented period of Fed leadership ambiguity.
The One Big Beautiful Bill Act, the Trump administration's sweeping fiscal and policy legislation, continues to be implemented. The muni tax exemption was ultimately left untouched in the legislation, removing the significant overhang on the muni market that had persisted through much of 2025. However, the bill's fiscal implications, including war-related expenditures from the Iran conflict, changes to Pell Grant eligibility, and student loan portfolio transfers to Treasury, are adding to the long-run deficit picture that is keeping long-end Treasury yields elevated and swap spreads wide. War-related expenditure is a structural headwind to long-end performance; the 30-year Treasury at 4.886% reflects genuine fiscal risk that is not going away regardless of how the Iran situation resolves.
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of April 17 at 2.56%, two basis points lower than April 10. The graph above contrasts a 5-year Breakeven Inflation Rate tracked weekly. This is the market implied inflation rate. We track this relative to core PCE, the Fed’s favorite inflation measure. The 10-year Breakeven Inflation Rate finished the period at 2.36%, the same as last week.
MUNICIPAL CREDIT
Last week's 10-year quality credit spread between BBB revenue bonds and AAA general obligation bonds was 0.79%, lower on the week by 3 basis points. The historical average credit spread is 1.68%.
TAXABLE CREDIT
Investment-grade spreads for the past week were at 101 basis points, 1 basis point lower than the previous week. The long-term average for investment grade is 1.56%. High-yield credit spreads are 2.59%, significantly lower than last week by 13 basis points.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Money market fund flows were negative across all categories.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were negative overall, with few bright spots.
ETF Fund Flows (millions of dollars)
Net ETF flows were positive in all categories.
SUPPLY OF NEW ISSUE BONDS
This week, the supply of new-issue municipal bonds is estimated at around $10 billion. This should be a manageable amount.
CONCLUSION
The week ending April 10th illustrated that volatility is not always in one direction. The failed ceasefire talks in Pakistan promised more market volatility next week (well, that is from where we sit on Sunday morning)—just a point of context: the Vietnam peace talks began in 1968 and concluded on 1/27/1973. Vietnam was a much longer conflict, but bargaining for peace can be tricky. On the home front, current indicators (jobs and inflation) suggest the Fed’s focus may shift from maximum employment to stable prices. We pose this theory not because of the last job’s reading (one number does not make a trend), but because of the 3-month average of 72,000 non-farm payroll jobs. This number is well above any of the monthly job-creation numbers discussed to maintain current employment levels. Inflation, on the other hand, has been sticky, looking behind us, and promises to be higher moving forward.
On the bright side, thanks to Artemis II, we can look to the stars and, as Theodore Roosevelt said, “Dare Greatly”.
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