Fed Delivers 25bps Cut, QT to End Dec. 1 — MUNIs Steady, Yields in Motion

• Zohran Mamdani’s lead in the New York City mayor’s race over former Governor Andrew Cuomo has narrowed less than a week before Election Day, according to a Quinnipiac University poll. The poll released Wednesday shows Mamdani, the Democratic nominee, leading Cuomo among likely voters by 43% to 33%. Recently, the latest surveys indicated that the contest is tightening in its final days.  We continue to monitor this race, and it is likely to have an impact on New York City’s lower-rated papers, such as the MTA, colleges, and certain Hospitals.  If you are buying NY paper, it would be wise to investigate the underlying credit quality.
• If you hold Chicago BOE’s, there is a possibility they will be called, as the system is issuing 1.1B of GO bonds in two series this week with the initial yields of 5.73%.  It is hard to determine what the funds will be used for; however, the coupons on the new bonds are hovering around 6% priced at a premium.
• US consumer confidence continues to fall this month (October), recording three straight months of dimmer views about the outlook for the economy and labor markets.  It was noted in yesterday’s (10/29) Fed meeting, focusing on job creation (or the lack thereof), as tariffs have now taken a back seat to this topic.
• MUNIs continued to firm last week, despite another volatile week in T-bills.  MUNI’s saw yield cuts on the front end of the curve, with yields rising 9bps, while yields moved down on the intermediate and longer end of the curve.  Demand remains firm, supply continues to slow, and with this, positive momentum should continue this week; however, as we have mentioned, we have seen T-bill yields move up slightly “post” rate cut.
• As we know, the Federal Reserve officials delivered their second consecutive interest-rate reduction to support a softening labor market. They said they would stop shrinking the central bank’s portfolio of assets on December 1. In their post-meeting statement on Wednesday, Fed policymakers reiterated their assessment that “job gains have slowed” and stated that “employment risks rose in recent months.”  We continue to expect a cut (approximately 70% currently) in December.  As we have also discussed, we have seen a rise in yields “post rate cut” as we did on the last move by the FED.  This is and should create an opportunity to place capital into the market.
• With the 25bps cut and an announcement that QT will end 12/1, the FOMC took the path of least resistance at its 10/28-29 meeting.  There have been signs in recent weeks that liquidity is tightening, and policymakers decided the cost of not stopping QT soon enough outweighed the benefit of continuing to shrink the central bank’s balance sheet.
• The rate cut aims to mitigate further downside employment risk, despite policymakers lacking the usual amount of data to assess the economy. We expect, along with others, that the shutdown will last well into November, and the FOMC members will most likely not have the October inflation and unemployment data when they next meet to set rates on 12/9-12/10.  We do, however, believe that the Fed will remain in “risk management mode” and cut another 25bps.
• Yesterday, 10/29, we saw two dissents: one from Fed Governor Miran, who was in favor of a 50-basis-point cut, and one from Fed President Schmid, who was in favor of “no cut.” This is interesting, and we expect there to be additional dissents at the December meeting.

Bottom line:

As we have been saying, yields are on the move, and the overall direction is down. We are seeing yields move up slightly today, 10/30, on T-bills, while MUNIs have remained steady across the curve. However, always remember that MUNIs typically lag T-bills. Therefore, if we see T-bills continue to move up in yield, we suspect yields on MUNIs will move up slightly over the next couple of days. With this in mind, we continue to remain ~150-200bps higher in yield than just two years ago. If you bought bonds, then, which most did, that is okay. If you stick with quality, you will see rebounds, as you saw with your bonds in September. In the meantime, if you are building a solid portfolio of fixed income, we continue to suggest that you insert capital here to counterbalance the bonds you purchased two years ago.