WEEK ENDING 5/30/2025
- Fiscal policy: anyone’s guess
- Powell and Trump meet one-on-one
- Core PCE comes in lower than last month
A CITY DIFFERENT TAKE
Tariffs dominated the last two weeks. The U.S. Court of International Trade ruled against the President’s tariffs, but the appeals court stayed the ruling giving the parties time to prepare for appeals. And the “Big Beautiful Bill” passed the House, its first hurdle — though getting through the Senate may be a little tougher. The best summary of the last two weeks can be found in Barrons in a piece penned by Randall W. Forsyth:
“Uncertainty has been the leading candidate for the word of the year, from nearly every corporate earnings conference call to the pronouncements of pundits about matters economic and political. Until now.
“Confusion will be the major theme,” veteran Washington watcher Greg Valliere, AGF Investment’s chief U.S. policy strategist, writes after the U.S. Court of International Trade ruled against many of the tariffs imposed by President Donald Trump. While an appeals court stayed the ruling, leaving the import taxes in place for now, confusion remains regarding talks with adversaries such as Russia and China, and most crucially for financial markets and the economy, the so-called big, beautiful tax bill.” Barrons Said it Best
The GDP’s second revision came in a little better than originally reported (-0.2% versus -0.3%). The Atlanta Feds GDPNow estimate for Q2 2025 was revised to 3.8% on May 30, up from a previous 2.2%. Just for context, the GDPNow estimate for Q1 2025 was -2.7% on April 29.
On the bright side, Core PCE came in at 2.5%, which is below last month’s revised 2.7%. This is a backward-looking time series and probably does not show the impact of tariffs, but then again, who or what could?
Given the changing dynamics of tariff and fiscal policy, it is very tough to plan for the future, as most earnings calls have corroborated.
CHANGES IN RATES
The Treasury market was a little more subdued over the last two weeks. The 5-year Treasury security experienced the most change, declining 0.10%. The “Big Beautiful Bill” debate in the Senate should significantly impact the Treasury market, given the long-term impact the legislation could have on the national debt (not a good thing).
Here is an interesting observation: on May 16, the 5-year Treasury security yielded 91.6% of the 10-year Treasury security’s yield (for 50% of the duration risk — nice value). On May 31, that yield ratio was 89.8%. Lower, but still a good value for the duration risk.
This upcoming week looks like the last of the new issue calendar weeks. The municipal market seems to have stabilized in anticipation of this event. On May 16, the 5-year municipal bond yielded 90.3% of the 10-year municipal bond’s yield (for 50% of the duration risk — also a nice value). On May 31, that yield ratio was 86.9%. Similar to the Treasury yield ratios — lower, but still a good value for the duration risk.
Short-term ratios were firmer, while long-term ratios widened a bit.
Corporate yields followed Treasuries and were lower for the week.
THIS WEEK IN WASHINGTON
Tariffs drove most of the action over the last two weeks, but a close second was the passage of the “Big Beautiful Bill” in the House. Many Republicans have been receiving heat from their constituents in town hall meetings:
“U.S. Sen. Joni Ernst posted a sarcastic apology video following a viral moment when she told a town hall audience member that ‘we all are going to die’ in response to concerns over Medicaid cuts.”
In the apology video, Sen. Ernst doubled down, adding she was glad she didn’t bring up the Tooth Fairy as well. Maybe she is unfamiliar with the maxim, “When you find yourself in a hole, stop digging.” We don’t think the Tooth Fairy wants any part of this kerfuffle.
Sen. Ernst was not the only political actor who found ad-libbing difficult. The president was visibly upset by the following interaction.
“A White House press briefing on Wednesday took a sharp turn when U.S. President Donald Trump was asked a question that clearly got under his skin. The source of the tension? A new Wall Street nickname for his trade tactics — ‘Taco,’ short for ‘Trump Always Chickens Out.’ And the reporter behind the viral moment was Megan Cassella, a CNBC correspondent known for her unflinching economic coverage.” A Memorable Moment or a Career Death Knell
The above are all facts!
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of May 31 at 2.29%, 3 basis points higher than May 16. The 10-year breakeven inflation rate finished the week at 2.34%, which is the same as the May 16 observation.
MUNICIPAL CREDIT
As of May 31, the 10-year quality spreads (AAA vs. BBB) were 1.04% — 7 basis points higher than the observation on May 16 (based on our calculations). The long-term average is 1.69%.
TAXABLE CREDIT
However, investment grade is showing some movement at 1.05%. The high-yield spread is lower at 3.05%.
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 positive on the whole for the two weeks ending May 1.
ETF Fund Flows (millions of dollars)
ETF asset classes saw a net decrease in inflows over the period.
SUPPLY OF NEW ISSUE BONDS
The supply of new municipal bond issues is expected to be closer to $18+ billion this week. This follows the last three weeks of a large calendar of $10+ billion.
CONCLUSION
The upcoming week looks to be one of the last significant new issue weeks for the municipal bond market before the summer doldrums. It has been an interesting week, but then again, which of the previous few weeks hasn’t been interesting? Core PCE looks to be decreasing, but doesn’t reflect tariff adjustments. We will get a reading on the employment picture at the end of the week, which should be the first indication of the economy’s reaction to the tariff and fiscal policy chaos. Teddy Roosevelt said, “In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing." But for investors with a well-diversified portfolio of stocks, bonds, and cash, T.R. may have been wrong. The best thing to do is nothing. If an investor is not diversified, the best thing to do is to get diversified. We have it on good authority that even Sen. Ernst’s “Tooth Fairy” would agree.
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