Space X (SPCX) came to market with the largest IPO in history on Thursday, June 11, with an initial price of $135.00. The stock closed at a high of $201.80 on Tuesday, up 49.5%. (Talk about irrational exuberance.) As of the close of business on Thursday, June 18, the price was $185.00 — a -8.33% retracement from Tuesday’s high.
All in all, a fine effort, but the Greek myth of Icarus is playing in our minds.
The Fed
Not surprisingly, the Fed left short-term interest rates unchanged at its June meeting in a unanimous vote. Many pundits talked a lot about the length of the Federal Open Market Committee statement (130 words vs. 300 words). Brevity is nice but do we really care? One of the changes under the new Fed chair is the lack of forward guidance:
“Warsh acknowledged a ‘difference’ in the statement early in his first press conference as chair on Wednesday. He said there was no forward guidance, as it was ‘not well suited for the current policy conjuncture.’” No More Forward Guidance
To paraphrase Pete Townsend of The Who, “Meet the new boss, not the same as the old boss.”
In addition to the communication changes:
“Regime change via task force: Warsh has been promising to shake things up at the Fed, and his first steps in doing so came through the announced formation of five task forces. They are charged with studying communication, the Fed’s balance sheet, the data sources on which it relies, productivity and jobs, the impact of artificial intelligence and other transformative technologies, and the central bank’s inflation approach.” Five new Task Forces
We are reminded of several tongue-in-cheek assessments of task forces or committees: “Task forces are the place where ideas go to die.” And “You know what a camel is? It’s a thoroughbred designed by a committee.”
One thing we did pick up on is Mr. Warsh’s focus on inflation:
“Chairman Kevin Warsh’s 43-odd minutes at the Federal Reserve’s podium Wednesday were intended to deliver the message that, slowly but surely, he will set about making the Fed quieter, more humble in its engagement with the markets and the economy, and — ultimately — laser-focused on inflation.” Is Inflation a Choice?
The Fed has been assigned a dual mandate, 1) maximize employment and 2) stabilize prices. Mr. Warsh, in his first press conference, was only focused on one:
“This committee will deliver price stability,” Warsh pledged Mandate Focus
As the presser unfolded, the two-year Treasury security took it in the shorts, closing Wednesday 0.13% higher in yield, a one-year high. The market implied probability of rate increases (yes, you are reading that correctly — increases) is between 22.3% and 53.7% for the remainder of 2026. Going back a few months, those market implied probabilities were low but indicated a 0.25% Fed cut in short-term rates.
Given the Fed’s typical tool to fight inflation (changes in short-term interest rates), this could set the stage for more conflicts with the President’s desire for lower rates. Granted, the new Fed chair is in his honeymoon period, but we have seen how quickly that can change. Just ask Jay Clayton. The Supreme Court’s current term is expected to end in late June or early July, so it is anticipated to hand down key decisions this week. We bet the new Fed chair would be interested in the Trump v. Cook decision.
CHANGES IN RATES
TreasuryMarket
Treasury yields were mixed for the week. Short rates increased and long rates were slightly lower. The 2/10 spread is at 39 basis points, which is flat compared to historical averages as seen below.
The long-run averages are between 90–100 basis points. There are big borrowings slated for the second half of the year. For Q3 of this year, the borrowing estimate is a massive $671 billion.
Municipal Market
AAA general obligation municipal bond yields declined across the maturity spectrum.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
The muni/Treasury ratios continue to richen well past the breakeven 63% for all but the longest maturities.
Investment Grade Corporates
Investment grade corporate yield adjustments mirrored Treasury where credit rallied last week. The 2/10 spread is 78 basis points.
On Wednesday, the United States released the official 14-point memorandum of understanding between the United States and Iran, an initial step to ending the conflict between the two parties. It is titled “Islamabad Memorandum of Understanding between the United States of America and the Islamic Republic of Iran.”
Oil futures (WTI Crude Oil) closed Thursday at $76.60, lower than the June 12 close of $84.88 (-9.75%). Over the same period, the S&P 500 index is up 0.93% and the 10-year Treasury is lower in yield by 0.026%. Other than oil futures, these market returns seem muted. This could be the market’s evaluation of the President’s Iran deal!
CNN News reported on the 14-point plan. In our opinion, this reads more like a very expensive precursor to a peace agreement. There are many lingering questions about Israel’s reaction or acceptance of these terms, what happens on day 61, the actual nuclear capabilities of a future Iran, the incredibly large sum of money being delivered to a “surrendering” Iran, and what might make a volatile Trump “go back to dropping bombs in the middle of their heads.”
Earlier in the conflict President Trump called for the “unconditional surrender” of Iran:
“In a Truth Social post, Trump wrote that ‘there will be no deal with Iran except UNCONDITIONAL SURRENDER!’ Following Tehran’s submission to the ongoing military campaign should be ‘the selection of a GREAT & ACCEPTABLE Leader(s),’ Trump said.” Pipe Dream?
This deal does not look like unconditional surrender and Mike Pence along with other Republicans are concerned:
“Former Vice President Mike Pence has warned the terms of the U.S.'s deal with Iran are ‘much bigger than a mistake,’ adding to the chorus of early Republican criticism of the agreement touted by President Donald Trump.” Bigger than a Mistake
Andreas Kluth of Bloomberg News summarized the “deal” as follows:
“Donald Trump is a man of his word: In March, the American president promised that ‘There will be no deal with Iran except UNCONDITIONAL SURRENDER!... IRAN WILL HAVE A GREAT FUTURE.’ He didn’t clarify that it would be the United States that would do the surrendering.”
It looks to us that Iran is stronger, now it knows how important the control of the Strait of Hormuz is. Sanctions will be removed, new investments will flow into the country, and on the whole this agreement looks weaker that the Joint Comprehensive Plan of Action (JCPOA) which President Trump withdrew the United States from. To get here, 13 U.S. service members died, and hundreds were wounded. Is this the “Art of the Deal” on an international scale?
Does the fact that the MOU was signed by the President of the United States in the Palace of Versailles bother anyone else or are we just overreacting to the ghosts of the past?
The graph above contrasts a 5-year Breakeven Inflation Rate (this is the market-implied inflation rate) tracked weekly with the core PCE inflation rate. The 5-year Breakeven Inflation Rate finished the week of June 19 at 2.27%. The 10-year Breakeven Inflation Rate finished the period at 2.25%.
Last week's 10-year quality credit spread between BBB revenue bonds and AAA general obligation bonds was 0.95%, unchanged week over week. The historical average credit spread is 1.67%.
A couple of interesting headlines hit our Bloomberg this week:
A First Ever Default Shakes an $80 Billion Corner of the Muni Market
Turns out that the inelastic demands these securities were based on are pretty elastic!
Brightline Bondholders Grant Extension on Debt Payment
To be fair that article was followed by this:
Brightline Florida’s May Revenue Rises 20% From Year Earlier
Investment-grade spreads for the past week were at 83 basis points. The long-term average for investment grade is 1.56%. High-yield credit spreads are 2.58%.
Money Market Flows (millions of dollars)
Money market fund flows were positive over all categories.
Mutual Fund Flows (millions of dollars)
Mutual fund cash flows were mixed for the week.
ETF Fund Flows (millions of dollars)
Net ETF flows were negative week over week.
This is a holiday week, but the calendar is at $11.1 billion. Despite the seasonally high new issuance volumes, municipal are outperforming their taxable equivalents.
SpaceX came to the market with Its IPO, right now it looks like a moonshot (pun intended). The new Fed chief began leaving his fingerprints on the “new” Fed. The early analysis is to expect more volatility out of the Fed. The U.S.–Iran MOU is getting little support from both parties (if you exclude the administration’s sycophants). There have been a couple of interesting credit developments surrounding two segments of the municipal market, but there has been no reaction to broader credit spreads.
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.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.
All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses. Actual portfolio returns may vary due to the timing of portfolio inception and/or investor-imposed restrictions or guidelines. Actual investor portfolio returns would be reduced by any applicable investment advisory fees and other expenses incurred in the management of an advisory account.
You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from City Different Investments. To the extent that a reader has any questions regarding the applicability above to his/her individual situation or any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal or accounting advice.
A copy of City Different Investments' current written disclosure statement discussing our advisory services and fees is available for review upon request.
Unless otherwise noted, City Different Investments is the source of information presented herein.
A description of the indices mentioned herein is available upon request.