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WEEK ENDING 12/05/2025
- December 7th marked the 84th anniversary of the attack on Pearl Harbor
- Mixed bag of fresh and stale data released for the week
- Data straddles the government shutdown muddling economic picture
- Market expectations of a December rate cut close to a lock
- Kevin Hassett takes the lead in race for next Fed chair
A CITY DIFFERENT TAKE
The week after Thanksgiving was stuffed with data, a bit like Turkey Day leftovers in our fridge: a little stale, but some fresher than others. The lack of regular data releases in the wake of the longest government shutdown in history makes evaluating the economy even more difficult. The table below highlights some of this week’s data releases:
As you can see, the data is a mixed bag of fresh and stale. It provides a mixed picture of the economy. The inflation data (Core PCE Y/Y), stale as it is, still sits stubbornly above the Fed’s 2.0% target. The degree of difficulty in judging the economy is increased by the fact that the data straddles the government shutdown.
We have a Fed meeting next week, and the market is implying a 95.2% probability of a 0.25% rate cut. The Wall Street Journal recently published an article entitled, “Where Do the Fed Voters Stand on a December Rate Cut”. The following table summarizes the article’s results: Next Fed Meeting Promises a Lively debate.
As you can see, there is a significant difference between the market implied probability of a 0.25% rate cut and the Journal’s outline of policymaker positions. The committee’s debate should be lively.
In the race for the next Fed Chair, Kevin Hassett looks like he is in the lead. Next Fed Chair Race. Chair Powell’s chairmanship is up in May. The fixed-income market’s implied probability of rate cuts from January to April 2026 is around 30%, but that jumps to 51.5% for the June meeting.
CHANGES IN RATES
Treasury Market
The Treasury yields increased last week, and the yield curve steepened slightly from 0.55% to 0.58%. Investors can earn approximately 90% of the yield on a 10-year Treasury security by buying a 5-year Treasury security, which carries about half the duration risk. The long-term average is about 77%. Not a bad value trade-off!
Municipal Market
Yields rose in the municipal market, but not nearly at the rate of the Treasury market. The municipal yield curve as measured by the spread between a 2-year and 10-year AAA general obligation bond steepened marginally by a basis point (not really worth mentioning). But, much like with the Treasury market, an investor earns about 90% of the yield of a 10-year AAA General obligation bond by buying a 5-year AAA general obligation bond (for about half the duration risk). The long-term average is about 77% (not a typo). Again — not a bad value trade-off!
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
Treasury-muni ratios were slightly lower across the yield curve because of a higher Treasury yield curve and relatively unchanged yields for the muni curve.
Investment Grade Corporates
Investment grade corporate bond yields moved higher week over week.
THIS WEEK IN WASHINGTON
The Rhyme of History
We have used the quote attributed to Mark Twain about history rhyming before, but the timing of the rhyme usually takes years (not months) to recognize. Maybe it’s a comment on memory, intellect, or staff competency — but why repeat your opponent’s mistake within months?
Biden’s Major Campaign Mistake:
“There’s just one problem, and it is one that will forever taint Biden’s legacy, the one that sank him and his party politically and for which he will always be remembered.
“Inflation and its onerous burden on households, particularly those at the lower end of the income spectrum, has dwarfed all the other good that happened on Biden’s watch. Even with the pace of inflation slowing markedly from its mid-2022 peak, consumers, investors and business owners continually cite it as their most pressing issue.
“‘Biden inherited an economy that was flat on its back because of the pandemic, and he’s bequeathing an economy that’s flying high,’ said Mark Zandi, chief economist at Moody’s Analytics. ‘Having said that, there are blemishes in the minds of many Americans ... They feel ripped off.’” Affordability?
This sounds like an affordability issue. How is the current administration handling the question?
“President Donald Trump suggested Tuesday that the rising cost of living in the United States is a “fake narrative” that is being pushed by Democrats.” Affordability Redux
What mistake did Biden make on the economy?
“According to exit polls, voters decided the 2024 presidential election based on perceptions of the U.S. economy. ‘Widespread voter anger about the economy appeared to boost former president Donald Trump in Tuesday’s election, emerging as one of Democrats’ chief liabilities even with low unemployment and robust growth,’ according to the Washington Post. ‘Two-thirds of voters rated the economy as “not so good” or “poor,” compared to just one-third who rated it as “excellent” or “good,” according to network exit polls. Of the voters who rated the economy negatively, 69% voted for Trump — a significant margin.’” Oops I did it again
Conclusion: It’s never good to tell the American public what they are feeling!
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of Dec. 5 at 2.34%, 5 basis points higher than the previous week. The 10-year Breakeven Inflation Rate finished the period at 2.26%, 3 basis points higher than last week's observation.
MUNICIPAL CREDIT
Last week's 10-year quality credit spread between BBB revenue bonds and AAA general obligation bonds was 0.92%, compared to a historical average of 1.68%, demonstrating very healthy and tight spread metrics.
Credit Issues on the Horizon
Brightline, the private rail line between Miami and Orlando, is not looking so bright. Ouch. Some of the Brightline bonds have traded at significant discounts. 10% coupon bonds with a July 15, 2059 maturity date traded on Dec. 2 at $0.33 on $1.00, Ouch indeed!
American Dream Mall, located in the swamps of New Jersey (sorry, “Boss”) has also had some troubles. The MSRB reported a trade of $0.4025 to $0.4000 on $1.00 on Nov. 18. Steep Discount for a 7.00% coupon of Dec. 1, 2050
TAXABLE CREDIT
Investment-grade spreads are tight at 0.98%, 3 basis points lower than last week. The long-term average is 1.57%. The high-yield spread is higher at 2.51%, compared to a historical average of 4.56%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Money market fund flows were higher across the board last week.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were a net negative compared to the prior week in most categories other than High Yield.
ETF Fund Flows (millions of dollars)
Net ETF flows were up last week, compared to the week prior.
SUPPLY OF NEW ISSUE BONDS
This week’s supply is projected to be $8.4 billion.
CONCLUSION
Sunday marked the 84th anniversary of the attack on Pearl Harbor. We have lost nearly all the Greatest Generation. The current generations in power could learn a great deal from their successes and avoid repeating their mistakes.
The economic picture remains somewhat unclear due to the delay in government statistics resulting from the government shutdown. The shutdown and its resolution also impacted consumer behavior and outlooks. The Fed has its December meeting this week. The market implied probability of a 0.25% rate cut is over 90%. Voting member sentiment is mixed, at least according to the Wall Street Journal article referenced earlier. Chair Powell’s term is up in May. The market is building a higher implied probability of subsequent rate cuts for later in 2026. Our crystal ball gets very cloudy looking that far into the future.
We are keeping our durations in the neutral range and maintaining our focus on the shorter maturities of our strategies’ investment universes. The 2026 Fed promises to be more dovish on short-term rates, and the impact on inflation is still up in the air. We suspect that this change in the Fed's stance will lead to a steeper yield curve.
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.
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