Executive Summary
Last week, stocks were down and bonds up (price up/yield down). The MSCI Emerging Markets index outperformed the S&P 500 and MSCI EAFE. The best performing sectors in the S&P 500 were energy, healthcare, and utilities. Across U.S. Russell style & market cap indices, large-cap value did the best, and the value factor led more broadly. As for fixed income, the 10 yr. Treasury yield fell 9 bps on the week to 4.41%. The best performing parts of the bond market were mortgage back securities (MBS), investment grade corporates, and Treasuries. High yield bond spreads were up last week to 308 bps, but still well-off recent highs of 453 bps.
The Fed
Concerns about the Fed have been two sided. On one hand, there is an expectation of a tariff-induced inflation boost, but on the other hand, the Fed is looking at a weakening economic backdrop. As a result, the market is debating if weakening economic demand (slowing growth) will offset inflationary pressures. The Investment Office is observing that both the labor market is cooling modestly and that tariff-induced inflation may be less impactful than investors previously expected on Liberation Day. As a result, the Fed is in “wait and see mode.” Currently, inflation is too high to motivate cuts, but not high enough to justify hikes. Therefore, we believe the labor market is the primary focus. We believe the labor market is on the edge of where it needs to be to drive potential cuts. The employment data will determine what the Fed does even with the potential “oil shock” associated with intensifying geopolitical risks.
Municipals
Last week, municipals outperformed Treasuries despite the second highest week of tax-exempt supply on record. May’s employment data exceeded expectations, easing concerns about a significant slowdown in the labor market; however, details suggest a cooling labor market. This week, Federal Reserve officials are in a blackout ahead of the June FOMC meeting, with attention shifting to inflation data. Current market pricing indicates investors expect the central bank to remain on hold, which is aligned with recent comments made by committee members.
A key contributor to municipal underperformance in the first five months of the year has been elevated supply. Issuance has reached record levels. Some of the increase in issuance can be attributed to a pull-forward of deals ahead of potential legislative changes, while the most recent draft of the tax bill indicates no material changes to the tax-exempt status of the asset class or its sub-sectors, issuers of private activity bonds, higher education, and healthcare securities have come to market at an elevated pace with year-to-date issuance for these sectors up 80-180% relative to their five-year averages, according to PIMCO.
Looking ahead, cheap absolute and relative valuations coupled with a change in market technicals should position the market well. Additionally, fund inflows have become more supportive. However, it’s important to note that broader US rate volatility could pose a challenge to investor sentiment in the intermediate term despite the attractive long-term outlook for municipal bond performance.
Weekly Commentary
Investment Commentary – June 16, 2025
Stuart Katz
Executive Summary
Last week, stocks were down and bonds up (price up/yield down). The MSCI Emerging Markets index outperformed the S&P 500 and MSCI EAFE. The best performing sectors in the S&P 500 were energy, healthcare, and utilities. Across U.S. Russell style & market cap indices, large-cap value did the best, and the value factor led more broadly. As for fixed income, the 10 yr. Treasury yield fell 9 bps on the week to 4.41%. The best performing parts of the bond market were mortgage back securities (MBS), investment grade corporates, and Treasuries. High yield bond spreads were up last week to 308 bps, but still well-off recent highs of 453 bps.
The Fed
Concerns about the Fed have been two sided. On one hand, there is an expectation of a tariff-induced inflation boost, but on the other hand, the Fed is looking at a weakening economic backdrop. As a result, the market is debating if weakening economic demand (slowing growth) will offset inflationary pressures. The Investment Office is observing that both the labor market is cooling modestly and that tariff-induced inflation may be less impactful than investors previously expected on Liberation Day. As a result, the Fed is in “wait and see mode.” Currently, inflation is too high to motivate cuts, but not high enough to justify hikes. Therefore, we believe the labor market is the primary focus. We believe the labor market is on the edge of where it needs to be to drive potential cuts. The employment data will determine what the Fed does even with the potential “oil shock” associated with intensifying geopolitical risks.
Municipals
Last week, municipals outperformed Treasuries despite the second highest week of tax-exempt supply on record. May’s employment data exceeded expectations, easing concerns about a significant slowdown in the labor market; however, details suggest a cooling labor market. This week, Federal Reserve officials are in a blackout ahead of the June FOMC meeting, with attention shifting to inflation data. Current market pricing indicates investors expect the central bank to remain on hold, which is aligned with recent comments made by committee members.
A key contributor to municipal underperformance in the first five months of the year has been elevated supply. Issuance has reached record levels. Some of the increase in issuance can be attributed to a pull-forward of deals ahead of potential legislative changes, while the most recent draft of the tax bill indicates no material changes to the tax-exempt status of the asset class or its sub-sectors, issuers of private activity bonds, higher education, and healthcare securities have come to market at an elevated pace with year-to-date issuance for these sectors up 80-180% relative to their five-year averages, according to PIMCO.
Looking ahead, cheap absolute and relative valuations coupled with a change in market technicals should position the market well. Additionally, fund inflows have become more supportive. However, it’s important to note that broader US rate volatility could pose a challenge to investor sentiment in the intermediate term despite the attractive long-term outlook for municipal bond performance.
Disclosure and Source
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