- While Chair Powell has asserted the Fed’s ongoing path of slowing the economy will result in inevitable economic pain for individuals and businesses -- not acting in the near term to curb inflation would hurt even more in the long run. As such, we expect to see higher policy rates at the Fed’s November and December meetings.
- Tighter monetary policy led to flattening yield curves during the quarter. The Treasury curve inverted across most tenors, while municipals flattened, but retained a positive slope.
- Distinct demand dynamics have made municipals historically resistant to yield curve inversion – as was reflected during the period. Demand was relatively strong for short-to-intermediate paper, and considerably weaker for longer periods, given investors’ aversion to long duration exposure amid rising rates.
- Municipal mutual fund outflows topped $100 billion during the quarter, the largest outflow cycle on record.
- Investment grade municipal yields are at their highest level in over 10 years, with solid credit fundamentals across most sectors. In the team’s view, further downside rate risks from Fed tightening could be diminished in the higher rate environment, with valuations looking well positioned to weather the anticipated economic deceleration.