WEEK ENDING 6/26/2026
- Ceasefire holds, but still risky
- Federal Reserve remains vigilant on inflation and peace deal
- Trade deficit stays complicated
A CITY DIFFERENT TAKE
Oil markets are pricing a resolution that does not yet exist.
Front-month WTI is trading below $70, within reach of February's pre-conflict close of $67.02, and shipping traffic through the Strait of Hormuz is gradually recovering as trapped supply works its way to global markets.
On the surface, the energy shock appears to be unwinding. But the surface is misleading. A missile struck a container ship in the strait overnight. Several ships have reversed course on mixed safety signals. Oman floated to European officials the idea of charging transit fees for Hormuz passage, a detail that barely registered in markets but speaks to how unsettled the post-conflict architecture remains. President Trump called the missile strike “a foolish violation of our ceasefire agreement” in a social media post, which is the kind of statement that signals displeasure without deterring repetition. The ceasefire is holding — but remains fragile.
That contingency matters for monetary policy in ways the market has not fully priced. Minneapolis Fed President Neel Kashkari, a voting FOMC member, moved from projecting a rate cut in March to penciling in a hike this year. His reasoning deserves careful reading. He did not simply react to the energy shock — he questioned whether the shock is actually over, saying plainly that he does not trust Iran to honor whatever agreement has been made. And then he went further, flagging what he described as broader inflationary pressures in the economy entirely independent of energy. That is two concerns layered on top of each other: geopolitical fragility extending the shock, and structural inflation persisting beneath it. His comments were treated as non-events because last week's dot plot already showed nine participants leaning toward tightening.
Trade data introduces a third layer of complexity that is easy to overlook and costly to ignore. The advance goods trade deficit unexpectedly grew to $105.8 billion in May, mainly due to a 5.4% drop in exports. The immediate cause is petroleum: U.S. crude exports surged in March and April when the Hormuz closure shifted global demand toward American production, creating an artificially high base that May's figures are now correcting. However, the more persistent issue is methodological. Since monthly trade data are reported in nominal dollars, oil price fluctuations don't just influence the figures — they can dominate them entirely, making the underlying trade signal difficult to interpret in real time.
This is a longstanding problem, but the energy shock has worsened it. When a single commodity's price can swing the headline deficit by tens of billions of dollars depending on where crude closes each month, the trade balance becomes an unreliable indicator of economic competitiveness or demand trends. What seems like a worsening trade position may mainly result from energy price normalization. Similarly, apparent export growth in March and April was partly driven by oil prices, not genuine trade strength. This distinction is critical for policy, as a widening deficit caused by petroleum price swings requires a different response than one driven by weak demand or import substitution through tariffs. Yet the monthly data, as currently constructed, makes that distinction difficult to draw with confidence until the revisions arrive, often quarters later. At a moment when the administration has staked significant political capital on narrowing trade imbalances, and when the Fed is trying to parse whether domestic demand is genuinely softening, a data series this contaminated by energy noise makes the picture blurry.
CHANGES IN RATES
TreasuryMarket
Treasury yields were mixed for the week. The 2/10 spread is at 28 basis points. Yields significantly flattened based on inflation data. This was a relief rally. The market perceives that the worst inflation news is behind us. Odds of a September hike receded from 100% on Fed Day to 76% by end of last week.
MunicipalMarket
Munis did not move much last week but remained expensive. The 2/10 slope is at 57 basis points, flat by historical data.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
The 7/1 principal-and-interest payment schedule is the peak of July reinvestment effect. There is a significant mismatch between supply (around $15 billion over the next 30 days) and demand ($44 billion being returned to holders). That is reflected in ratios below. Munis are rich according to their seasonal pattern. However, ratios look better week over week because of the Treasury curve flattening.
Investment Grade Corporates
Investment grade corporate yield completely diverged from Treasury market rally. Credit market saw rates go up. The 2/10 spread is stable at 77 basis points.
THIS WEEK IN WASHINGTON
Let’s take a quick at how midyear elections shape municipal ballot initiatives. 139 statewide measures have already been certified; historical patterns suggest the final count will reach 175 by November, roughly 14% above the ten-year average.
California is the center of gravity with 14 measures on the November ballot including a proposed billionaire wealth tax and three bond authorizations totaling nearly $45 billion. There’s also a proposal to raise the voter threshold for local special tax increases from a simple majority to two-thirds. If that last measure passes, it would structurally constrain the revenue flexibility of local issuers in the country's largest municipal market.
Nationally, the dominant theme across 31 tax-related measures in 16 states is not tax expansion but tax limitation. Florida's homestead exemption changes. North Carolina's income-tax rate cap. Iowa's supermajority requirement for income-tax increases.
The pattern is consistent enough to be a signal. But the impact will not be uniform, and that is precisely the point. The fiscal consequences of any single measure depend on issuer-specific variables, revenue composition, existing exemption exposure, and reliance on property taxes versus other sources that a top-down, state-level analysis will miss entirely.
Moving to Iran, the 60-day period for negotiating the MOU is underway; any official breakdown resets the energy shock theory. The situation has escalated into an active exchange of drone and missile strikes between the U.S. and Iran, with Iranian attacks now targeting U.S. military bases in Kuwait and Bahrain. The core issue is a fundamental dispute over control of transit through the Strait of Hormuz. Iran advocates for sovereign oversight, while the U.S. Navy is expanding alternative routes, which Tehran views as a ceasefire breach. Ship traffic through the strait is currently well below typical levels, and with the 60-day negotiating window ticking down, Trump has publicly stated that Iran “will no longer exist” if strikes persist.
According to an Axios report, the U.S. and Iran have agreed to stop attacking and resume peace talks.
WHAT, ME WORRY ABOUT INFLATION?
The graph above contrasts a 5-year Breakeven Inflation Rate (this is the market-implied inflation rate) tracked weekly with the core PCE inflation rate. The 5-year Breakeven Inflation Rate finished the week of June 26 at 2.21%. The 10-year Breakeven Inflation Rate finished the period at 2.20%. Both these numbers are lower week over week
Month-over-month core PCE for May came in at 0.32%, exactly as expected, and the year-over-year core rate ticked up from 3.3% to 3.4%.
The Federal Reserve is going to view this as a confirmation that inflation is not yet moving in the right direction. The more important detail is in the composition. The monthly gain was disproportionately driven by financial services and airfares, the latter up another 2.7% in May, now running 26.7% year-over-year. Both of which reflect energy pass-through and idiosyncratic pricing rather than broad-based demand pressure.
MUNICIPAL CREDIT
The 10-year quality credit, which is the difference between BBB revenue bonds and AAA general obligation bonds, was at 0.93%.
TAXABLE CREDIT
Investment-grade spreads for the past week were at 87 basis points. The long-term average for investment grade is 1.56%. High-yield credit spreads are 2.75%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Money market fund flows were mixed with outflows in the government and prime categories.
Mutual Fund Flows (millions of dollars)
Mutual fund cash flows were mixed for the week.
ETF Fund Flows (millions of dollars)
Net ETF flows were mixed week over week.
SUPPLY OF NEW ISSUE BONDS
This week’s calendar is at $11+ billion. This year’s supply calendar has been robust and running 120% of the 5-year average.
CONCLUSION
Three themes are running simultaneously through this week's data, and none of them resolves cleanly into the other. The geopolitical ceasefire is structurally dependent on Iranian restraint. At least one voting Fed member explicitly does not assume the ceasefire to last. The inflation backdrop is stickier than the crude price decline implies, with Kashkari pointing to pressures that exist independently of energy. And the data itself is distorted enough by oil price volatility that the signal is genuinely difficult to extract from the noise in real time. Oil markets have chosen to price the optimistic scenario across all three. The Federal Reserve, or at least a vocal and consequential part of it, has not. That gap between where crude trades and where voting FOMC member's risk assessment sits is an important tension.
We will not publish the Week in Review next week as we pause to celebrate America’s 250th birthday. Happy Fourth!
IMPORTANT DISCLOSURES
The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates presented herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.
All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses. Actual portfolio returns may vary due to the timing of portfolio inception and/or investor-imposed restrictions or guidelines. Actual investor portfolio returns would be reduced by any applicable investment advisory fees and other expenses incurred in the management of an advisory account.
You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from City Different Investments. To the extent that a reader has any questions regarding the applicability above to his/her individual situation or any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal or accounting advice.
A copy of City Different Investments' current written disclosure statement discussing our advisory services and fees is available for review upon request.
Unless otherwise noted, City Different Investments is the source of information presented herein.
A description of the indices mentioned herein is available upon request.