The Fed meeting is a real toss-up this time. Here’s what that means for your portfolio.
The Signal
Yields moved higher again this week. The 10-year Treasury touched 4.70% as we write this, and munis and corporates followed, pushing prices lower across the curve. We expect these levels to hold, with limited relief until after the Federal Reserve’s July 29 meeting.
Underneath that move is a genuine split over what the Fed does next. Jobless claims fell to 187,000 last week, well below the roughly 210,000 economists expected, a sign the labor market may be firmer than recent data suggested. Firmer labor data alongside sticky, war-driven inflation is exactly the combination that could tilt the Fed toward a hike rather than a hold.
What’s Driving It
A Fed Meeting With Genuine Uncertainty
Fed Chair Kevin Warsh has broken with his predecessors by declining to signal the central bank’s next move in advance, and that shift is showing up in market pricing. Traders currently see roughly a 35% chance the Fed raises its benchmark rate by a quarter point on July 29, versus a 65% chance it holds steady, a split this close to a meeting that has been rare in recent years. We continue to expect no change at this meeting, but we are watching this one more closely than most.
MTA: A Credit Story Built on Necessity
We have been constructive on New York’s Metropolitan Transportation Authority for some time, and the case keeps getting stronger. MTA operates North America’s largest transportation network, serving 15.3 million people and underpinning a $2.4 trillion regional economy. Spreads on MTA paper to the AAA curve have compressed from more than 365 basis points in May 2020 to as little as 13 basis points earlier this year. In a muni market starved for spread, we think the next source of outperformance is in issuers essential enough that they simply cannot be allowed to fail.
The Technical Backdrop Still Favors Buyers
July has historically been a strong month for munis, helped by seasonal reinvestment demand, and this year’s backdrop looks broadly supportive: demand remains robust and geopolitical tensions have shown signs of easing. At the same time, this year’s record issuance pace continues to hold up better than many expected, which we read as a structural catch-up following years of post-financial-crisis austerity rather than a warning sign. Credit spreads and oversubscription rates remain tight versus historical norms, and yields have held in well despite the heavier calendar.
The Iran Conflict Remains the Wild Card
The prolonged conflict in Iran, and its inflationary knock-on effects, continues to argue against a quick return to this year’s early lows. We expect intermediate yields to stay range-bound and highly sensitive to headlines out of the region. Any pullback tied to supply shocks or shifting oil prices should be treated as a potential entry point rather than a reason to step back.
Our Take
Bottom line: yields have risen every trading day this week, up roughly 10 basis points across the curve, and that has pushed pricing down on most fixed income assets. We see this as a direct result of two forces working together: uncertainty heading into the July 29 Fed meeting, and the ongoing conflict in Iran. July’s economic data will likely come in lower than what we’ve seen year-to-date, but with the 10-year hovering near 4.70% as of this writing, yields on munis and corporates continue to climb.
Jobless claims complicate the picture further. Claims fell to 187,000 last week, well below the roughly 210,000 economists expected, a sign the labor market may be firmer than recent data suggested. That kind of print gives the Fed room to consider a hike even as broader inflation data argues for patience.
We are watching three things closely: the path of oil prices tied to the Iran conflict, the tone Chair Warsh strikes at his July 29 press conference, and whether the current pace of municipal issuance can continue to clear at these levels without further concession. Any of these could shift our positioning.
The fact is that yields are up, and we expect them to remain elevated until after the Fed meets. Once that decision is behind us, we think many investors will take a breath to reassess where things stand, and we’ll be ready to act when they do.
Recommendations
Use this window to add exposure
Elevated yields ahead of the Fed meeting may create attractive entry points for disciplined buyers. We do not expect a meaningful pullback in yields until after July 29.
Favor essential-service credits
Issuers like MTA, where the underlying service is indispensable to the region it serves, continue to offer real value as spread compression continues across the muni market.
Stay engaged through the Fed meeting
We expect volatility to persist through July 29, and we are monitoring the meeting closely on your behalf.
Take advantage of larger deals
Oversubscribed order books and record issuance have not stopped deals from clearing well. Larger issuances may offer liquidity and pricing advantages compared with smaller offerings. Reach out if you’d like to discuss this in the context of your portfolio.
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.
