Market volatility intensified last week as incoming economic data injected fresh uncertainty into the interest rate outlook and prompted sharp swings across both equity and fixed income markets. While Brent crude oil remained elevated, energy markets were relatively contained as concerns over escalating geopolitical tensions in the Middle East temporarily receded.
The week’s most significant catalyst came Wednesday with a slightly hotter-than-expected Consumer Price Index (CPI) report. The initial market reaction followed a familiar script, with renewed inflation concerns driving Treasury yields sharply higher and pushing the 10-year Treasury yield toward recent highs near 5.33%. However, the narrative quickly shifted.
The S&P 500 fell from Tuesday’s close near 7,805 to below 7,700 during the session as valuation-sensitive growth sectors came under pressure. By week’s close the tech heavy index slid down to 7,659 suggesting market jitters had some teeth.
That equity weakness, triggered a meaningful flight-to-quality bid for Treasuries. Investors rotated capital out of equities and into fixed income, reversing the morning selloff and producing a sharp rally in government bonds. The move extended into Thursday, with the 10-year yield retreating toward the technically significant 5.02% level that had been breached during the market’s recent advance. This level will likely remain a floor for Treasuries and should be looked at as a short-trade opportunity given the broader fundamental pressures remain intact.
Thursday’s stronger-than-expected Producer Price Index (PPI) report failed to reverse the rally in Treasuries. Under normal circumstances, a firmer inflation reading would likely have placed additional upward pressure on yields. Instead, investors remained focused on the potential implications of a higher-rate environment for technology sector earnings and future growth, sustaining the safe-haven demand for government bonds.
However, the next PCE release will arrive after the October 28 FOMC meeting, limiting the Committee’s ability to incorporate the data into any near-term policy decision.
Despite the stronger inflation backdrop, expectations for another Federal Reserve rate increase moved only modestly. Fed funds futures implied approximately a 23% probability of an October hike before the CPI release. Those odds briefly climbed to 32% before settling near 27% by week’s end, suggesting that investors continue to view the hurdle for additional tightening in the immediate future as relatively high.
Recent commentary from Federal Reserve officials had generally reinforced the view that policymakers could afford to remain patient. Governor Michelle Bowman emphasized a data-dependent approach and the importance of evaluating incoming information before determining the next policy step. Following the inflation reports, however, the tone became somewhat more cautious. Chicago Fed President Austan Goolsbee expressed disappointment with the inflation data, while Richmond Fed President Thomas Barkin similarly acknowledged the challenge of ensuring inflation continues its path lower.
With financial conditions already restrictive and economic growth showing signs of moderation, the Federal Reserve may prefer to maintain a wait-and-see approach, particularly as policymakers navigate an increasingly complex economic and political backdrop. Thus my prediction for only one rate hike for the remainder of the year to occur in December remains intact.
Contributions from Ryan Riffe
With just four trading sessions, last week proved to be one of the strongest periods for the municipal market in recent months. A pronounced flight to quality trade fueled a powerful Treasury rally which led to a similar move for the municipal market. After surrendering a portion of Tuesday's gains on Wednesday, the Treasury market staged an impressive rally on Thursday, producing one of its largest single-day moves of 2026, with benchmark yields declining by as much as 17 basis points.
Two-way trading activity has been healthy, supported by robust municipal bond fund inflows of approximately $1.6 billion according to Lipper, while seasonal tax-loss harvesting has continued to generate a steady stream of customer-driven selling. Despite this supply of bonds, demand has remained resilient and helped support market performance throughout the week.
Looking ahead, new issuance is expected to normalize at roughly $12 billion, modestly above the year-to-date weekly average of $11.03 billion. While supply is set to increase from last week's shortened calendar, favorable fund flows, strong reinvestment demand, and an improving rates backdrop should continue to provide support for the municipal market in the near term.
| 2-YR | 65% |
| 3YR | 65% |
| 5-YR | 67% |
| 10-YR | 74% |
| 30-YR | 91% |
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.
Investing involves certain risks, including possible loss of principal. You should understand and carefully consider a strategy’s objectives, risks, fees, expenses, and other information before investing. The views expressed in this commentary are subject to change and are not intended to be a recommendation or investment advice. Such views do not take into account the individual financial circumstances or objectives of any investor that receives them. All indices are unmanaged and are not available for direct investment. Indices do not incur costs including the payment of transaction costs, fees, and other expenses. This information should not be considered a solicitation or an offer to provide any service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Past performance is no guarantee of future results.
© 2025 SWBC. All rights reserved. Securities offered through SWBC Investment Services, LLC, a registered broker/dealer. Member FINRA & SIPC. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor, registered as such with the US Securities & Exchange Commission. SWBC Investment Services, LLC is under separate ownership from any other named entity. SWBC Investment Services, LLC a division of SWBC, is a nationwide partnership of advisor.