WEEK ENDING 6/20/2025
● Peace in the Middle East?
● FOMC keeps rates unchanged
● Senate passes stablecoin legislation
A CITY DIFFERENT TAKE
Peace in the Middle East? The prospects look dim. The war between Israel and Iran started on June 13, and there is currently no end in sight. Iran is not backing down from its uranium enrichment program. Israel is on the offensive, claiming to have killed several Iranian scientists and strategic military leaders, and warning of a long war.
The big question was, “Would the U.S. intervene?” President Trump originally delayed a decision on involvement, stating he’d have some type of guidance in two weeks.
But on Saturday, President Trump announced that the U.S. had successfully hit three nuclear sites in Iran, including Fordow, Natanz, and Isfahan. The president also announced that the key nuclear sites were “completely and totally obliterated,” which has yet to be independently confirmed. Iran has responded by saying it reserves all options to defend itself. As of this writing, no signs of radioactive contamination have been found. The big question now is “will Russia and China come to Iran’s aid?”
The financial markets have been weathering this geopolitical maelstrom. Crude oil has been hovering around $75 a barrel, 18% higher than before the war started. Analysts are now warning that prices could hit $100 a barrel, depending on Iran’s response to the surprise attack. But as oil prices go up, the consumer price index (CPI) will, in turn, increase. Welcome to the interconnectedness of the world.
However, the Middle East conflict is not by itself a doomsday scenario for gas prices based on a variety of factors — the first being that historically, the rise in price caused by conflict is typically temporary. Second, this is not a large increase in prices. Third, the U.S. is now a net exporter of oil. Finally, our gas consumption has trended downwards over the years.
The Federal Reserve met last week and kept rates unchanged in the range of 4.25%-4.50%. The most awaited guidance from the Fed for the markets was a summary of economic indicators, or SEP. SEP projections still call for two more rate cuts for this year and one for next year. It also shows expectations of higher inflation and slower growth. FOMC increased its headline inflation forecast to 3% for 2025 and 2.4% for 2026. Growth has been downgraded to 1.4% in 2025 and 1.6% in 2026. Unemployment for 2025 is 4.5%, and the exact figures for 2026 are forecasted to be anywhere between 4.2% and 4.7%.
The crypto markets had a landmark win last week when the Senate passed stablecoin legislation. Stablecoins are digital assets designed to hold a steady value and are usually pegged to another currency. They are essential for the proper functioning of crypto markets. This bill sets regulatory rules for cryptocurrencies to be pegged to the dollar. Dollar-pegged stablecoins would have to hold one-for-one reserves in short-term government debt. The bill must make its way to the House.
CHANGES IN RATES
The Treasury market was mixed week over week.
The municipal market saw a small rally throughout all tenors.
The most significant ratio changes were in the five-year tenor, down by 1.85%.
Corporate yields followed Treasuries and were lower for the week.
THIS WEEK IN WASHINGTON
The world is anxiously awaiting Iran’s response from Saturday’s shocking airstrikes. Oil prices have risen by almost 6% since the attack this weekend. There are rumors about the U.S. now backing a regime change in Iran.
President Trump is calling strikes on Iran a “spectacular military success.” Vice President Vance has signaled that Iran’s uranium stockpile is still intact.
The heightened geopolitical risk has moved attention away from the trade deals. We are nearing the July 8 deadline to achieve “90 deals in 90 days.” The U.S. is currently negotiating trade deals with more than 100 governments at the same time.
In other news from the weekend, the Joint Committee on Taxation released tax costs of the mega-bill at $441 billion. The costs for tax legislation is in contrast with the traditional scoring method used by the House in May where costs were around $3.8 trillion. The big discrepancy comes from Republicans using a “current policy baseline” which assumes that tax cuts set to expire in 2025 will continue. This avoids accounting for $4 trillion in tax cuts, as this is not a change in current tax policy.
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of June 20 at 2.29%, 2 basis points higher than last week. The 10-year breakeven inflation rate finished the week at 2.33%, 5 basis points higher than the May 30 observation.
MUNICIPAL CREDIT
As of June 20, the 10-year quality spreads (AAA vs. BBB) was 3 basis points lower than the prior week at 0.91% (based on our calculations). The long-term average is 1.69%.
TAXABLE CREDIT
However, investment grade is showing some movement at 0.98%. The high yield spread is lower at 2.90%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Overall, money market funds were up last week.
Mutual Fund Flows (millions of dollars)
Cash flows into bond mutual funds were down week-over-week. Municipals saw increased inflows.
ETF Fund Flows (millions of dollars)
ETF asset classes saw a positive inflow over the period.
SUPPLY OF NEW ISSUE BONDS
The supply of new municipal bond issues is expected to be closer to $10+ billion this week. This is a large supply week before the $45 billion July reinvestment, looking for new bonds.
CONCLUSION
There is no peace in the Middle East. Both Israel and the U.S. are attacking Iran’s nuclear facilities. The world is waiting for Iran’s reaction. The Federal Reserve left rates unchanged, with the key being their guidance for the statement of economic projections.
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