The Unknown

The Unknown


WEEK ENDING 5/31/2024

  • “I just don’t know.”
  • Municipal bond market underperforms prior to seasonal summer drought.
  • 34–0


The Treasury market has been quiet in the week preceding Memorial Day and the short week following. Treasury rates have drifted higher. All inflation gauges have shown slight declines but not enough for the Federal Reserve to signal that rate cuts are on the horizon. Investors can pretty much pick and choose from regional presidents’ recent comments to support rate cuts or not. New York Federal Reserve President John Williams best summarized this conundrum in a recent interview with CNBC’s Sara Eisen:           

“The honest answer is, I just don’t know,” Williams said during a Q-and-A session with CNBC’s Sara Eisen before the Economic Club of New York. “I do think that monetary policy is restrictive and is bringing the economy a better balance. So I think at some point, interest rates within the US will, based on data analysis, eventually need to come down. But the timing will be driven by how well you achieve your goals.”

Readers should be skeptical that the writer of that article is cherry-picking data. The real story for municipal bond investors is the underperformance (or end of the period of out-performance) of the municipal bond market. Trees don’t grow to the sky, and nothing goes up forever.



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Treasury rates moved higher over the two-week period. There was very little reaction to the PCE release. Ten-year Treasury bond yields reached a high of 4.61% on May 29 and settled in at 4.51% to close out the month.

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Welcome to the “Yield Rally.” The municipal market has woefully underperformed the Treasury market over the last two weeks. This has given investors a buying opportunity before the seasonal summer drought in new-issue supply. Yields finally succumbed to new-issue pressure. New-issue supply levels have been over $10 billion for the last few weeks (holiday weeks excluded). That pressure finally took its toll. See the ratio table below for further confirmation.

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The municipal/Treasury ratios increased across the yield curve. All maturities now exceed the national breakeven ratio level of 63% for those in the highest tax bracket.

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Corporate rates were moderately higher on the week, following Treasury rates.



graphs in order (1)


Over the last two weeks, it seemed like all attention was turned toward Manhattan. That attention reached a crescendo on Thursday as the jury in former President Trump’s hush money case returned their verdict. Before and after the verdict, many Republican politicians showed up to support the former president — whether they were bending the knee or just looking for job interviews.

The last time we paid attention to scores coming out of Manhattan was May 19 when the “Nova Knicks” were eliminated from the NBA playoffs. That was until this last Thursday:

34–0, guilty.

At least the Knicks didn’t get swept.

Moving from basketball to baseball, Major League Baseball (MLB) officially integrated all stats from the Negro Leagues (1920–1948) into their record books, giving countless unsung Black ballplayers like Josh Gibson and Satchel Paige their due alongside the household names of Babe Ruth and Lou Gehrig.

One step forward. 34 steps back.



The 5-year Breakeven Inflation Rate finished the week of May 31 at 2.36%, four basis points higher than the close of May 17. The 10-year Breakeven Inflation Rate also finished the week at 2.35%, three basis points higher than the close of May 17.



10-year quality spreads (AAA vs. BBB) as of May 31 were 1.11%, tighter by 2 basis points from the May 17 reading (based on our calculations). The long-term average is 1.70%.

Quality spreads in the taxable market are not attractive. They ended the two-week period marginally higher at 0.70% from the May 17 level. High-yield quality spreads were higher at 2.97%.



Money Market Flows (millions of dollars)Screen Shot 2024-06-03 at 9.13.49 AM

Money market funds saw positive cash flows in all classes.

Mutual Fund Flows (millions of dollars)
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Bond fund categories saw increased cash flows. Only the high-yield category was lower.

ETF Fund Flows (millions of dollars)Screen Shot 2024-06-03 at 9.14.13 AM

All ETF asset classes saw drops in cash flows.



The supply of new issues is expected to exceed $15 billion this week, marking another strong week in the muni market.



The future path of Fed Funds rate cuts remains uncertain. As such, we will maintain our neutral view on portfolio positioning and continue with our overweight to the shorter end of the SMA’s relative investment universes. Municipal bonds are now priced above breakeven levels across the yield curve compared to the highest federal tax rate. The seasonal drought in new-issue supply coupled with one of the largest coupon payment and maturity dates of the year should be supportive of prices in the municipal market; all else equal, over the next few months.



As we reflect on this past Memorial Day (a day to remember those brave women and men who paid the ultimate price for our freedoms) we also look ahead to June 6 and the approaching 80th anniversary of Operation Overlord. More commonly known as “D-Day,” June 6 is a day of heroic significance and solemn remembrance.

Tom Brokaw termed the generation of driven, momentous women and men who lived and fought through World War II “The Greatest Generation” for a very good reason. We can learn a lot from those folks and the alliance of world powers that came together to stop fascism in its tracks.

Mark Twain is rumored to have said, “history does not repeat, but it does rhyme.” Those rhymes are getting louder every day, especially in Europe. As we sit our reflections on Memorial Day and D-Day, we offer you this question: like that “Greatest Generation,” will we as a nation have the right stuff to protect this 250-year experiment in self-governance as well as our allies?

Let’s hope so.


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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