The Nor’easter Impacts After the Bond Market Storm Fixed income markets were battered last week in a fitting prelude to the nor'easter that swept across much of the Northeast coastline over the weeken...
The Nor’easter Impacts After the Bond Market Storm
Fixed income markets were battered last week in a fitting prelude to the nor'easter that swept across much of the Northeast coastline over the weekend. While the storm's immediate impacts included power outages, coastal flooding, and widespread disruption to daily life, the forces unsettling financial markets appear likely to be far more persistent.
As I have argued for several months, the disruptions facing the economy and markets are unlikely to prove transitory and may endure much longer than many investors anticipate.
The selloff intensified on Wednesday as a combination of factors pushed Treasury yields decisively above an important technical resistance level. The initial catalyst was a much stronger-than-expected Purchasing Managers Index (PMI) report, with activity reaching its strongest level since 2021. Pressure then accelerated following a notably weak 5-Year Treasury auction, which saw yields move above 5% for the first time since 2007. Adding fuel to the move were more hawkish comments from Federal Reserve officials, including Barr's observation that "further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion." Meanwhile, Brent crude reversed its recent decline and moved back above $95 per barrel, reinforcing inflation concerns.
Markets have responded by repricing the path of monetary policy.
Futures now imply the possibility of as many as four additional rate hikes before the terminal Fed Funds target is reached. More importantly, investors are increasingly concerned that inflation is no longer being sustained solely by supply-side disruptions stemming from the conflict with Iran. Instead, evidence is mounting that stronger demand may now be contributing to upward price pressures, a dynamic that is typically more difficult for policymakers to contain.
My forecast for 10-Year Treasury yields to revisit the 2007 peak near 5.32% remains unchanged.
Once that level is reached, the natural question becomes what comes next. From a technical perspective, the next meaningful targets lie near 5.40%, followed by the 2001 high of approximately 5.53%. Until there is convincing evidence that inflationary pressures are beginning to moderate, or that economic activity is slowing sufficiently to alter the policy outlook, I see little reason to expect the prevailing upward trend in rates to reverse. Much like the nor'easter that lingered longer and proved stronger than many expected, the forces driving rates higher continue to intensify, suggesting the storm for fixed income markets is not yet over.
From the Municipal Desk
Contributions from Ryan Riffe
The municipal bond market selloff intensified this week as renewed inflation concerns and stronger-than-expected midweek PMI data pushed rates sharply higher across the curve. By Friday's close, benchmark yields in the 1-3 year segment had risen by as much as 48 basis points, while intermediate and long-term maturities moved up nearly 30 basis points.
Pressure on municipals has been building since mid-summer as Treasury yields surged higher amid a relentless calendar of new issuance.
This week's selloff was exacerbated by a wave of liquidations, with institutional and retail investors alike bringing supply to market at the fastest pace seen since the COVID-era dislocations.
The combination of rising underlying rates, heavy issuance, and forced selling created a particularly challenging backdrop for municipal investors.
The market will now turn its attention to approximately $11 billion of new issue supply scheduled for next week, closing out what has been a particularly volatile and difficult September. With Treasury yields continuing to press higher and inflation concerns resurfacing, the municipal market remains firmly at the mercy of the broader rates environment.
Weekly Cuts (Yield Increase) to MMD Benchmarks
- 2027: 48 bp
- 2028–2029: 45 bp
- 2030: 42 bp
- 2031: 41 bp
- 2032–2033: 39 bp
- 2034: 33 bp
- 2035: 32 bp
- 2036: 30 bp
- 2037–2040: 26 bp
- 2041–2043: 25 bp
- 2044–2045: 24 bp
- 2046–2047: 23 bp
- 2048: 21 bp
- 2049: 20 bp
- 2050: 19 bp
- 2051–2056: 18 bp
An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.
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