Geopolitical developments in the Middle East continue to dominate headlines, but their impact on oil markets has become notably more subdued than earlier in the conflict. Last week, reports of continued U.S. strikes on Iranian targets following attacks on commercial shipping in the Strait of Hormuz generated significant media attention. While Brent crude prices moved higher with oil on fire again as concerns over refining capacity and supply disruptions resurfaced, market reactions were generally more measured than in prior episodes. As I noted previously, the pre-conflict oil price near $70 per barrel appeared unsustainable, as it reflected little if any geopolitical risk premium despite the potential for Iranian-related disruptions to global energy supplies.
Interestingly, interest rates declined through most of the week despite rising oil prices and the inflationary risks typically associated with higher energy costs. Although the 10-year Treasury yield remained above the 4.50% level, it retreated meaningfully after reaching 4.63% early in the week. Cooler-than-expected inflation data combined with a sharp selloff in technology stocks created strong demand for fixed-income assets and supported lower yields.
Kevin Warsh's first appearance before the Senate Banking Committee was generally well received by markets. He reaffirmed a firm commitment to controlling inflation while strongly defending the Federal Reserve’s political independence. Although political theatrics were expected, Warsh navigated the questioning effectively, including several contentious exchanges. He also advocated for the formation of targeted policy task forces staffed by experienced leaders, though I remain skeptical about the practical benefits such initiatives are likely to deliver.
Equity markets were largely range-bound before weakening later in the week as investors reassessed technology and AI-related growth expectations. For some time, I have suggested that a seasonal summer pause or modest correction was increasingly likely, and recent market action appears consistent with that view.
Looking ahead, I expect Brent crude oil to remain above $80 per barrel, with a meaningful possibility of revisiting $100 per barrel if geopolitical tensions persist. Interest rates are likely to face upward pressure as energy costs feed into inflation expectations and weigh on fixed-income markets. Equities may remain volatile, with downside pressure likely in the near term. While recent inflation readings offered some relief, I believe progress toward lower inflation will be uneven, and a "higher-for-longer" environment remains the most probable outcome as geopolitical risks continue to influence global markets.
Contributions from Ryan Riffe
Despite strong inflows and a manageable new-issue calendar, the municipal market struggled for a second consecutive week. By Friday’s close, benchmark yields had risen by as much as 12 basis points in certain parts of the curve. The 15- to 18-year maturities experienced the greatest weakness, with yields increasing nearly 20 basis points over the past two weeks.
Investors were more selective in deploying cash, putting both the primary and secondary markets on the defensive. Several new issues saw balances concentrated in the 2039–2043 maturity range, while both the front end and long end of the curve remained heavily oversubscribed.
The market appears to be recalibrating following the strong rally from late May through early July. Despite this week’s underperformance, there are still several positive developments as we look ahead. The 10-year municipal-to-Treasury ratio has rebounded from a recent low of 65% and moved closer to 70%, a level that has historically represented a more attractive entry point for investors. In addition, municipal bond fund inflows remain robust, with another $1.36 billion added this week, according to Lipper data.
The market is expected to absorb just over $11 billion of new-issue supply next week, modestly above the year-to-date weekly average of $10.5 billion. We believe the recent weakness has created a buying opportunity, given the attractive levels of both absolute yields and relative value ratios.
Muni-Ratios Week Prior
2-YR Ratio @58% 2-YR Ratio @57%
3-YR Ratio @60% 3-YR Ratio @58%
5-YR Ratio @63% 5-YR Ratio @60%
10-YR Ratio @69% 10-YR Ratio @66%
30-YR Ratio @85% 30-YR Ratio @84%
An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.
The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield. • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September. • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September. • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.
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