FOMC Minutes Signal Extended Pause as Market Eyes 2026 Cuts

• Minutes from the FOMC meeting should show a broad consensus to hold rates steady after three straight cuts.  Many, including Bloomberg, expect limited pressure to cut rates beyond Miran and Waller, who dissented at the meeting.   The meeting is now “water under the bridge”; however, many expect the minutes to show greater “popularity” within the FED for a longer “hold” on rates than thought before.  FOMC participants could keep rates unchanged for some time, but many are calling for a total of 100bps cut this year.
• If you recall, in December, a few who supported cutting rates indicated that the decision was finely balanced or that they could have supported keeping the target rate unchanged.  Another indication of the “extended pause” is the broader concern (DRL has been saying this for several years) that the 2.00% inflation objective could be “unrealistic,” and this would also signal an extended pause.  Regardless of all of this, we are expecting a minimum of 75bps of cuts this year and another 75bps in 2027.  I have attached a graph to illustrate what the market expects from rate cuts.
• We sent an article out on 2/17 regarding Mamdani, indicating he will push for the NY first property increase in more than two decades as the “last resort.”  This will only happen per the mayor if he is unable to persuade the state to approve the tax hikes on the city’s wealthiest residents.  Regardless of the state’s position, we see this tax hike happening either way. If you are buying NYC taxed back bonds, this could be a bullish indicator for the payments on this paper.
• The AAA MUNI curve is telling two different tales across the front and long end YTD.  Since October 2025, the yield curve has undergone a renewed bull steepening, with the rally concentrated in the front end following two .25 cuts in Q4 and demand for MUNI paper.  Conversely, longer end rates rose by about 5-10bps over the same period. This is due to the elevated supply and broader rate volatility.  
• The share of bonds trading below par has declined sharply across all credits, which is underscoring a structural migration back towards par pricing.  To put this into perspective, 4% coupons: in mid-2025, 75% of the paper was trading below par; now, only 49%.  5.00% coupon, only about 1% of the paper out there is trading below par, and those would be more on the High Yield side.  This is a direct indicator illustrating how the market has improved over the past 12 months.
• We have been speaking about heavy volume – despite the tight spreads, low ratios, and a shifting seasonal backdrop, MUNIs were absorbed nicely in January and all of February so far. Right now, issuance patterns are aligned geographically with areas of significant infrastructure demand, and this happens to be in many “high tax states” such as CA and NY.  Texas, however, is also on the list for higher issuance due to the population growth we have seen over the past few years.  This will be good for buyers in these high-tax states who are looking for both FED- and State-Exempt paper and we expect this trend to continue.
• We have seen healthy demand in GO, school districts, water and sewer, healthcare, and higher education, all of which account for the largest share of the primary issuance.  Since 2024, these sectors have accounted for about 51% of the supply in aggregate.

Bottom Line

Yields should hold around here for the next few weeks, if not move up perhaps 4bps. We have seen a large move in the 10T, which has pushed MUNI yields down around 5-7bps across the curve. Based on the moves we have seen in the T markets (and the rapid decline in yields), I would expect a small “bounce up” in yields over the next couple of days. Again, if you are seeking quality paper in SMA accounts, it is a good entry point for those seeking MUNIs.