The new Fed Chair just weighed in on inflation. Here’s what it means for your portfolio.
The Signal
Federal Reserve Chairman Kevin Warsh, appearing at the European Central Bank’s annual Forum on Central Banking in Sintra, Portugal, said this week that inflation expectations and inflation risks have come down in recent weeks, while reaffirming the Fed’s commitment to its 2% target. For a market that has been navigating a sharp and confusing reversal, it was a notable signal from a new Fed Chair on a prominent global stage.
The speed of that reversal is worth acknowledging. Just two months ago, the prevailing conversation was about rate cuts. Today, the word being used is hike. That whipsaw has unsettled parts of the market. We view it as opportunity. Yields remain somewhat elevated while credit quality is strong, and Warsh’s tone at Sintra suggests the Fed is watching carefully rather than acting prematurely. We continue to be buyers.
That rate picture is developing against a seasonal backdrop that independently favors municipal investors. Geopolitical tensions have eased, more than $100 billion in combined July and August redemptions are approaching, and fund demand remains firm. As we have said to clients, portfolios often grow when they sleep, not when they sweat. Tax-free yields of 3% to 4% are among the most attractive in years, and carry, not capital gains, should do much of the work through September. We have been buyers in the 12-to-20-year part of the curve since January 2026 and continue to believe this is a logical entry point.
In our June 25 edition, we flagged the convergence of easing geopolitical risk and seasonal demand as the setup to watch. Warsh’s remarks at Sintra this week brought the rate picture into alignment as well.
What’s Driving It
Geopolitical easing is clearing the path.
US Treasuries rallied last week on quarter-end buying, intensified by crude oil futures moving toward pre-conflict prices and firming market conviction for only one rate increase over the next 18 months. The Iran situation remains fluid, and as we have been discussing with clients, patience is likely to pay off.
The new Federal Reserve Chairman is recalibrating the inflation outlook.
Warsh made the same case at his inaugural press conference as Fed chairman last month. That consistency matters. A new Fed chair who does not escalate when he has the world’s attention at a forum like Sintra is signaling a posture, not improvising. He is watching, not reacting. That is precisely the environment we have been describing to clients, and it supports our view that the current rate environment is a window for investors, not a warning.
Summer supply and redemption dynamics favor buyers.
Contracting summer issuance, paired with more than $100 billion in combined July and August redemptions, should solidify the constructive seasonal backdrop. This week’s new issuance calendar, compressed by the holiday, declines to $4.7 billion.
Fund strength continued last week, with approximately $633 million in inflows. We expect rates to taper off over the next few weeks and hold steady in this range as the summer seasonal takes hold.
Institutional demand continues to deepen.
Municipal mutual funds have attracted nearly $29 billion in net inflows, the strongest pace in five years, with investors adding cash in 20 of the past 25 weeks, including the most recent nine consecutive weeks of positive flows.
The business of overseeing individually tailored municipal bond portfolios has continued to grow rapidly. Assets in separately managed accounts reached $1.6 trillion last year, according to JPMorgan Chase, a 44% increase since 2017, with SMA managers now among the largest holders of state and local government debt.
Our Take
Municipal bonds just defied a historic wave of June issuance, and the case for staying the course is strengthening.
As primary activity cools, the path forward favors investors who treat short-term pullbacks, whether from rate volatility, supply shifts, or changes in fund flows, as potential entry points to lock in long-term exposure. This validates the positioning we have been recommending for the past several months.
July has historically been a strong month for municipals as the summer seasonal backdrop takes hold. This year it opens with a more favorable rate picture than most: geopolitical tensions are easing, oil is retreating, and the new Fed Chair has just told a global audience that inflation risks are coming down. That is not a typical July setup.
Warsh’s remarks at Sintra and falling oil prices are pointing in the same direction: inflation risks are easing, and the urgency for rate action is diminishing. There is active discussion about a potential increase in the Federal Funds rate, but we believe it remains premature to treat a hike as a settled outcome, and Warsh’s tone suggests the Fed agrees. The two variables we continue to watch are the pace of Iranian negotiations and any shift in seasonal fund flows. Our positioning remains unchanged: we are buyers, carry is the thesis, and we are watching for any volatility that creates a better entry point.
Recommendations
Let carry do the work this summer
Tax-free yields of 3% to 4% are among the most compelling in years. Rather than seeking capital gains in a volatile rate environment, we favor collecting income while seasonal tailwinds support the market through September.
Use short-term pullbacks as entry points
Any disruption from rate volatility, supply shifts, or changes in fund flows may represent an opportunity to add long-term exposure at favorable levels. We are watching and prepared to act.
Stay focused on the 12-to-20-year curve
That has been our positioning since January, and the summer backdrop reinforces it. The belly and longer end continue to offer the best risk-adjusted carry for tax-sensitive investors.
Reach out to discuss your portfolio
If you would like to review your current positioning against this summer’s technical backdrop, we are available and would welcome the conversation.
We wish everyone a safe and joyous Fourth of July, and a Happy 250th Birthday to our great country.
Let’s Talk
If you would like to discuss any of the above in the context of your portfolio, reach out. This market environment rewards preparation — and that is exactly what we are here to help with.
