As developments surrounding the conflict with Iran and a series of hotter-than-expected inflation prints weighed on sentiment last week, interest rates pushed to new cyclical highs as bond prices sold off. Equities, which had been extended, subsequently pulled back as concerns over persistent inflation led investors to scale back expectations for Federal Reserve easing. However, the market proved resilient, rebounding by week’s end. Oil prices, meanwhile, remained highly reactive, fluctuating alongside the latest geopolitical headlines coming out of the Middle East.
The prior week’s inflation data - most notably CPI at +3.8% and PPI at +6.0%, both above expectations - played a key role in shifting market psychology. These readings challenged the prevailing view that rate cuts were still likely in 2026, prompting investors to reassess the policy outlook. Fed Funds futures moved meaningfully, suggesting that a rate hike, rather than cuts, could be on the table before year-end. This shift underscores the increasingly complex backdrop facing the Fed as it balances persistent inflation pressures against still-resilient growth. With new Fed Chair Kevin Warsh set to take office, several policymakers have already emphasized that inflation remains their primary concern.
Despite the initial unease, equities ultimately stabilized as the broader growth narrative held firm. Economic demand remained resilient, and markets avoided any signs of forced deleveraging or systemic stress. Notably, AI-related equities once again demonstrated relative strength, quickly stabilizing and resuming their upward momentum, reinforcing their role as a key pillar of market leadership.
The bond market also found some footing by the end of the week after testing higher yield levels. Yields peaked at approximately 4.14% on the 2-year, 4.68% on the 10-year, and just under 5.20% on the 30-year, before modestly retracing. Even so, each tenor remains above key psychological and technical levels - 4.00%, 4.50%, and 5.00%, respectively -highlighting that the market continues to embrace a “higher-for-longer” rates regime.
From a positioning standpoint, a more neutral approach appears warranted given that yields remain near recent highs and could move further depending on incoming data and geopolitical developments. The uncertainty tied to the Iran conflict, its influence on oil prices, and broader geopolitical instability argue for caution. While opportunities to position both long and short will continue to arise, the current environment calls for a “caution flag” in racing terms - suggesting investors should wait for clear setups with well-defined risk-reward before deploying capital more aggressively.
Over the Memorial Day weekend, developments in the Middle East helped push Brent crude prices sharply lower, breaking below the key $100/bbl threshold. Reports of incremental progress in peace negotiations - despite continued attacks from both sides - appeared to gain credibility. In response, Treasury futures rallied strongly in Sunday evening trading. Later, when the cash market opened, 10-year yields moved down below 4.50%, while 30-year yields declined to test the psychologically important 5.00% level.
If momentum toward a resolution continues, the recent peak in yields may ultimately mark the high for this cycle. Although it will likely take time for oil production and distribution to fully recover to pre-war levels, the easing in geopolitical tensions is a constructive signal for inflation. Lower energy prices should help temper inflation pressures and begin to slow the recent upward trajectory in price levels.
From the Municipal Desk (with contributions from Ryan Riffe):
The municipal market faced another choppy week of trading as Treasury yields continued to push higher. Underlying volatility was driven more by shifting rate expectations and uncertainty around policy direction rather than any one singular catalyst. Adding further pressure was the transition to a new Fed Chair under Kevin Warsh and how he will ultimately navigate the current environment. Municipals largely followed the movements seen in the Treasury market. After Tuesday's close, benchmark muni yields rose by as much as ten basis points in certain parts of the curve.
The new issue calendar continues to command attention, with issuance still running at a pace that could challenge the record levels set in 2025. Even so, tone improved modestly in the back half of the week as headlines pointed to potential progress on the geopolitical front. That shift helped bring some relief to the market, with intermediate and longer maturities retracing part of the earlier move higher and yields edging lower into the weekend.
At its core, the municipal story remains broadly unchanged. While headline risk tied to inflation, rates, and geopolitics has created surface-level volatility, underlying demand remains firm. Fund inflows continue to be supportive, and the seasonal pickup in summer reinvestment capital is beginning to come into focus. With a shortened trading week ahead and roughly $8 billion of expected issuance - down from closer to $15 billion previously - the lighter supply backdrop could offer some near-term support. Although volatility is likely to persist, the combination of steady demand and reduced supply may allow the market to build momentum heading into June.
Weekly Supply @ $7.8 Billion
Muni-Ratios Week Prior
2-YR Ratio @ 64% 2-YR Ratio @ 63%
3-YR Ratio @ 64% 3-YR Ratio @ 62%
5-YR Ratio @ 66% 5-YR Ratio @ 64%
10-YR Ratio @ 69% 10-YR Ratio @ 66%
30-YR Ratio @ 89% 30-YR Ratio @ 86%
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