WEEK ENDING 7/11/2025
● Tragic Texas flooding
● Derby to be the next Fed Chair has begun. Two people enter, one person leaves.
● Increased pressure on Chair Powell. Let the framing begin!
● Back to the future with tariff bingo
● “Big, Beautiful Bill” becomes “Big, Beautiful Law”
A CITY DIFFERENT TAKE
The celebration of the nation’s birthday was marred by the terrible news of massive flooding in Texas. As of Friday morning, 120 people have died and 173 are still missing, including many summer campers. The president toured the devastated area and visited victims.
Most of the economic reports since our last commentary on June 27 have indicated a stable economy. Nonfarm payrolls came in above expectations at 147,000 with a prior monthly upward revision.
The Federal Reserve released the minutes from its June 18 meeting. The minutes highlight a divide in the central bank’s rate-setting committee.
“The Fed’s June meeting minutes, released Wednesday, point to two broad groups on the central bank’s rate-setting committee. A sizable minority doesn’t expect to cut at all this year. They are fearful that after four years in which inflation has run above the Fed’s 2% goal, customers will grow more accepting of higher prices and businesses will have greater reason to test their appetite.” The Latest from the Fed Whisperer
We will get our latest readings on inflation next week. The major question affecting the Fed and market participants is when tariff-related price increases will show up in the inflation numbers (if at all). We think they will, but the tariff chaos makes predicting the timing more than difficult. Barron’s confirmed our suspicion in this week’s “Up and Down Wall Street” column:
“The June inflation data due this coming week should show at least some preliminary impacts from tariffs. How persistent these price pressures are seen to be will determine if rate cuts will be on the table soon.” Tariff Impact on Prices
CHANGES IN RATES
Yields in the Treasury market were higher over the period. Could this be a reaction to the continued bashing of Fed Chair Powell? Or just a reaction to decreased probabilities of a Fed rate cut. On June 27, the market priced a 91.9% probability of a 0.25% rate cut in September. By July 11, that probability had dropped to 63.4%.
Or maybe it was a reaction to our “whack-a-mole” tariff policy. The slope of the Treasury yield curve (as measured by the 2-year/10-year slope) flattened over the period from 0.56% to 0.53%.
The municipal market saw lower yields in the shorter part of the yield curve. The municipal AAA general obligation yield curve steepened over the period.
The above ratios indicate that, relative to the Treasury market, the municipal market outperformed across all tenors. Is this the beginning of the long-awaited summer rally?
Investment grade corporate bonds also moved higher in yields .
THIS WEEK IN WASHINGTON
The politicking to become the next Fed chair begins. Chair Powell’s term as chair is up in May of 2026. President Trump has launched a series of epithets his way to browbeat Chair Powell into bending to his will. The president wants the independent Fed to cut short-term interest rates (the only part of the yield curve it controls). Back in June, the Wall Street Journal mentioned several likely candidates:
“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.” All Lined Up at the gate
Since then, the field has narrowed. Two people enter, one person leaves. Or as the Journal titled it, “Two Kevins Battle to Be Next Fed Chair in Trump’s Apprentice-Style Contest”:
“WASHINGTON—Two Republicans named Kevin are vying to be the next chairman of the Federal Reserve. One is rising to the top of the list of potential candidates, while the other is facing skepticism from President Trump’s allies.
Kevin Hassett, one of Trump’s closest economic advisers, is emerging as a serious contender to be the next Fed chair, according to people familiar with the matter. Hassett’s rise threatens the other Kevin—former Fed governor Kevin Warsh—an early favorite for the job who has angled for the position ever since Trump passed him over for it eight years ago. Some people close to the president worry that Warsh, who isn’t in Trump’s inner circle, won’t be a champion of lower rates.” Who's Fired?
The Powell bashing has reached new lows:
“Office of Management and Budget Director Russell Vought vowed Friday to press an investigation into renovations at the Federal Reserve building, which he called a ‘palace’ where costs are running amok.” Knives Out
The president’s “Big, Beautiful Bill” narrowly passed the House and Senate and was signed into law on July 4. No matter what you think of this legislation, the scariest part for the fixed income markets is the increase in the debt ceiling by $5 trillion. It’s kind of like increasing the credit limit on a reckless teenager’s credit card who just blew through their existing limit. Another example of good parenting or, in this case, good governing.
Finally, we are back to playing tariff bingo. President Trump announced new tariffs on Canada, Brazil, and copper. During the week, the S&P index posted flat to marginally positive returns, while in the bond market, the 10-year Treasury bond yield was 0.03% higher. A muted reaction so far. The TACO effect, perhaps? If that was not enough, we woke up Saturday morning to this Wall Street Journal headline:
“Trump Threatens 30% Tariffs on EU, Mexico” Or maybe not!
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of July 11 at 2.30%, which is three basis points higher over the period. The 10-year Breakeven Inflation Rate finished the period at 2.37%, eight basis points higher than the observation on June 27.
MUNICIPAL CREDIT
As of July 11, the 10-year quality spreads (AAA vs. BBB) were four basis points lower than the period ending June 27 at 0.93% (based on our calculations). The long-term average is 1.69%.
TAXABLE CREDIT
However, investment grade spreads are showing some movement at 0.96%. The high yield spread is lower at 2.75%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Overall, money market fund flows were up compared to two weeks prior.
Mutual Fund Flows (millions of dollars)
Across the board, cash flows into bond mutual funds increased slightly for the period.
ETF Fund Flows (millions of dollars)
ETF asset classes saw a positive inflows over the period.
SUPPLY OF NEW ISSUE BONDS
The supply of new municipal bond issues is expected to be closer to $11.1 billion this week. The municipal market seems to be handling the elevated new issue supply well.
July new issuance of municipal bonds is estimated to be between $40 billion and $50 billion. This should be enough to manage demand for reinvestment.
CONCLUSION
The “Big, Beautiful Bill” has passed. The government has voted itself a new, larger credit limit. That can only be good for us. (Please note the heavy dose of sarcasm.)
Powell-bashing continues, and all major administration appointees fall in line with their criticism. If the Fed’s independence is its superpower, will this continued bashing prove to be its kryptonite? (Krypto-, not to be confused with “crypto.”)
We are in the middle of a new round of tariff wack-a-mole, and the probabilities of a Fed rate cut are decreasing. Other than that, the summer weather is pleasant—unless you are in Texas, Ruidoso, N.M., or most of the East Coast. Couldn’t be climate change, could it? Check your insurance premiums for confirmation.
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