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WEEK ENDING 10/02/2026
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- Inflation slightly lower, employment picture stable, and treasury yields higher (go figure)
- Municipal yields stage a surprising rally on Wednesday through Friday, but remain higher for the month
- The little engine that could not
- The Senate stages a real “Schmitt Show”
A CITY DIFFERENT TAKE
As September ends, fixed-income markets have experienced volatility unlike anything they’ve seen in a long time. Treasury rates are higher across the yield curve by 0.28% to 0.51%, depending on maturity. Rates are higher in the municipal market despite a surprise rally on Wednesday and Friday. Rates are higher by 0.45% to 0.615%, depending on maturity.
The economic news was stable. The JOLTS survey data was released this week.
“August brought another month of low-hire, low-fire balance for the labor market.” No Jolt from the JOLTS Release
Treasury yields were virtually unchanged on the day. Municipal yields were higher by 0.02 to 0.05%.
Following that release, the market absorbed the week’s only inflation report on Wednesday. Year over Year, the Core PCE 3.0% versus the 3.3% expected, and July’s number was revised lower to 3.0% from the original 3.3% release. Lower but still above the 2.00% target. The range of rate changes was +0.05% for thirty-year Treasuries and -0.03% for most other maturities. The change in yields in the municipal bond market averaged about -0.10% across the yield curve.
Friday was the release of the all-important Jobs report.
“Nonfarm payrolls rose by just 29,000 in September, well below the 84,000 forecast. The unemployment rate increased to 4.2%, though largely due to an influx of members in the labor force.” Jobs, Jobs, Jobs
Treasuries closed the day higher in yield by 0.02% to 0.05% while municipal rates were lower by about 0.06%.
The markets’ outlook is changing. Confidence in the Treasury market and a 0.25% rate hike in October (implied probability of 64.2% on 9/25/2026) has dropped to 22.7% at the close of business on Friday. Our internal estimate of an October action was lower because of the proximity to the mid-term elections. The fact that the administration is sending more troops and another carrier may have spooked the Treasury market participants:
“The U.S. is sending the USS Theodore Roosevelt carrier strike group and the 13th Marine Expeditionary Unit to the Middle East, U.S. officials confirmed to Fox News.” Shades of a Vietnam-style buildup!
All in all, this week’s economic reports have given the Fed ample room to do nothing in October.
“The September employment report will give Federal Reserve officials little reason to change their underlying view of the economy, and it removes one potential obstacle to holding interest rates steady this month.” Nothing to see here
The US is not alone in dealing with higher interest rates, “France’s Bond Crisis Deepens as Investors Head for the Exit,” per Bloomberg. A selloff in global debt has fueled a rout that’s hitting harder and faster in France than anyone expected. Nerves are fraying about missed deficit targets, policy gridlock, and next year's presidential elections that could radically alter the country’s direction. The budget shortfall was supposed to narrow to 5% this year. Instead, it’s heading in the opposite direction.
Sound familiar?
THE TREASURY MARKET
It has been a volatile week and month for the fixed-income markets. Rates have been rising at a pace not seen in years. The change in quality spreads has not been affected by the base rate moves, well, at least not yet. The increase in yield that an investor is promised to buy a BBB-rated security versus an AAA security is stable at 0.93%. The slope of the yield between 2 and 10 years finished the week at 0.45%.
On the credit side, there are some early cracks in the AI investment deluge.
“Oracle set out last year to lease a massive AI data-center campus being built in New Mexico’s Doña Ana County, part of a blitz of deals to create computing power for OpenAI.
Earlier this week, Oracle delivered a force majeure notice to Stack Infrastructure—the site’s developer, which is owned by investment firm Blue Owl Capital funds—that it would push back the date at which it will pay full rent. The lease gives Oracle the right to do that for up to three years. Project Jupiter’s first phase was originally expected to be completed in the third quarter of 2028.” Problems?
Over the month of September, cash flows into investment-grade mutual funds are down -$3.6 (B). The increase in rates and the lowering of the core PCE readings for July and August have made the real rate for all Treasury tenors positive and above their long-term averages. The range of variations of the real yield calculations (tenor yield less an inflation measure) are anywhere from 0.123 to 0.396 standard deviations above their long-term averages. (based on CDI calculations). Investors must not like it when bonds are on sale.
THE MUNICIPAL MARKET
Interest rates in the municipal market were mixed week over week, driven by a late-week price rally. Rates were about -0.10% lower for most tenors and marginally higher for the longest maturities. No doubt this phenomenon was driven by the relatively cheap ratios versus a Treasury market equivalent to start the week and rumors of new deals getting pulled due to the interest rate volatility. A ten-year AAA general obligation bond yielded about 80% of a ten-year Treasury security at the beginning of the week and ended the week at 74.8%. Cash flows for municipal mutual funds were -$5.2(B) for September. Real Yields are marginally positive for most tenors of AAA general obligation municipal bonds.
The slope of the municipal AAA general obligation yield curve also flattened, to our surprise. The slope of the 2–10-year AAA general obligation bonds were 0.57% at the close of business on 10/02/2026 versus 0.58% at the close of business on 9/25/2026. Quality spreads in the municipal market have been largely unchanged week over week. But there are some cracks in the municipal high-yield market. This may be an early driver of widening credit spreads. Bloomberg reported:
“Distressed-debt hedge funds Diameter Capital Partners, Redwood Capital, and FourSixThree Capital bought about $190 million of Brightline’s municipal bonds from Nuveen.
The sale cleared at 45 cents on the dollar, with the hedge funds considering the price to be a lowball offer, as some of the bonds had previously traded about 20 cents higher.
Brightline will receive $258 million in bankruptcy financing from Assured and other muni investors, along with a commitment for another $490 million of debt after it exits Chapter 11.”
The Brightline Project is the United States' only privately owned, operated, and maintained intercity passenger rail system.
THE CORPORATE MARKET
Corporate bond yields moved higher on the week, largely shadowing the rate changes in the Treasury market. Investment Grade corporate debt increased in yield between 0.04% and 0.15% depending on maturity.
THIS WEEK IN WASHINGTON
We grew up expecting a certain amount of decorum and preparedness from our Senators in Washington, D.C. The last few weeks have significantly tested that long-held belief. From questions about bestiality and FBI hiring standards to Senator Tuberville’s concerns about “furries” in the airline industry, the Senate has covered some unusual ground lately.
The Schmitt Show
Missouri Senator Eric Schmitt expressed no remorse Wednesday for falsely accusing Jack Smith of lying to Congress about attending a basketball game as a ruse to investigate President Donald Trump — and for creating a viral moment that critics have seized on to undercut the GOP’s case against the former special counsel.
We always thought you never asked a question you didn’t already know the answer to. Times have changed.
CONCLUSION
Interest rate environments like these are difficult. To borrow a Jack Bogle line, “Stay the course” is usually the best advice. But investors should be aware of a couple of risks in their accounts that will be important because of the rise in rates. The degree of negative convexity in an account means that as rates rise, so will the duration of the client's account, thereby increasing capital losses if rates continue to rise. This is a readily available risk measure. This will impact both taxable and municipal accounts.
On the municipal side, the rise in rates and consequently the decrease in average dollar price may make a client’s account susceptible to adverse tax consequences based on the security's lower dollar price. Please reach out to Chris or Sweta for a more detailed discussion of these risks.
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