Bond markets were mixed Tuesday and equities rallied after a mixed inflation report all but ensured a Federal Reserve rate cut in September.
The two-year muni-UST ratio Tuesday was at 60%, the five-year at 63%, the 10-year at 75% and the 30-year at 94%, according to Municipal Market Data's 3 p.m. ET read. ICE Data Services had the two-year at 58%, the five-year at 62%, the 10-year at 74% and the 30-year at 94% at a 4 p.m. read.
The week hinges on inflation data, said Chris Brigati, managing director and CIO at SWBC.
The consumer price index report was mixed.
"The combination of stronger core and softer headline readings has left some traders struggling for direction," said Daniela Sabin Hathorn, senior market analyst at Capital.com. "There is a reason to be both bullish and bearish depending on which CPI reading you wish to focus on."
Interest rates appear to have absorbed the data well, so muni flows have kind of been "pretty solid," Brigati said.
With the inflation print in hand, it's shaping up as a "decent Tuesday" for the summer, he noted.
"Overall, the markets are kind of hanging in there. We didn't see much change or movement or a selloff overall. It's just steady as usual," Brigati said.
The market will now turn its attention to the producer price index, set to be released Thursday, to see if the print changes the inflation narrative, he said.
Most analysts, and the markets, expect a Fed rate cut in September.
However, even before the increased probability of a cut to the fed funds target rate after the weak employment report earlier this month, the front end of the muni yield curve was "already efficiently priced, with short and low duration yields attractive mostly to individual investors in only the highest federal income tax brackets," said Pat Luby, head of municipal strategy at CreditSights, and Wilson Lees, an analyst at the firm.
And now that the expected fed funds rate cut now is a given, short-term munis have rallied further, something CreditSights strategists expect to continue even though short-term yields no longer appear "compelling" on a relative value basis.
Tax-exempt munis remain "rich" versus USTs, with after-tax UST yields now exceeding those of AAA-rated tax-exempt munis, they said.
"When compared to equivalently rated corporate bonds, the front end of the tax-exempt curve offers lower yields than their taxable municipal and corporate counterparts, on an after-tax basis," Luby and Lees said.
There is already intense competition for new issues in the short to intermediate part of the curve, and they note incremental demand is likely to further compress yields.
Out long has been both "ample and increasing," with supply set to peak in October, CreditSights strategists said.
"Despite this supply, incremental demand has not materialized to the same extent, resulting in notably cheap long-term tax-exempt yields," they said.
Beyond 15 years, tax-exempt yields are "sufficiently attractive to benefit insurance companies and other corporate investors subject to the 21% federal income tax rate," they said.
In the primary market Tuesday, Jefferies priced for the National Finance Authority priced $466.271 million of municipal certificates. The first tranche, $407.404 million of Series 2025-A-1 bonds (/AA-//), saw 4.216s of 11/2042 at 5%.
The second tranche, $52.455 million of Series 2025A-2 bonds (/BBB//), with 4.216s of 11/2042 at 5.40%.
The third tranche, $6.412 million of unrated subordinate Series 2025-B bonds, saw 4.216s of 6/2049 at 7.00%.
Barclays priced for the New Jersey Housing and Mortgage Finance Agency (/AA-//) $200 million of social multi-family revenue bonds. The first tranche, $96.695 million of non-AMT bonds, Series 2024D-1, priced at par with 2.9s of 11/2026, 3.2s of 5/2030, 3.25s of 11/2030, 4.05s of 5/2035, 4.1s of 11/2035, 4.85s of 11/2040, 5.1s of 11/2045, 5.15s of 11/2050, 5.2s of 11/2055 and 5.25s of 11/2060, callable 11/2033.
The second tranche, $103.305 million of non-AMT bonds, Series 2024D-2, saw all bonds priced at par: 2.85s of 11/2026 and 2.95s of 5/2028, noncall.
BofA Securities priced for Riverside, California, (Aa3/AA-//) $140.635 million of refunding sewer revenue bonds, Series 2025A, with 5s of 8/2026 at 1.91%, 5s of 2030 at 2.03%, 5s of 2035 at 2.94% and 5s of 2040 at 3.84%, callable 8/2035.
BofA Securities priced for the Board of Trustees of the Metropolitan State University of Denver (Aa2/AA//) a $110.13 million of Colorado State Intercept Program-insured institutional enterprise revenue bonds (Student Housing and Event Center Project). The first tranche, $100.565 million of Series 2025A bonds, saw 5s of 12/2027 at 2.48%, 5s of 2030 at 2.68%, 5s of 2035 at 3.57%, 5s of 2040 at 4.30%, 5s of 2045 at 4.81%, 5.25s of 2050 at 4.95% and 5s of 2055 at 5.06%, callable 6/2035.
The second tranche, $9.565 million of taxable Series 2025B bonds, priced at par: 4.09s of 12/2027, 4.305s of 12/2030 and 4.605s of 12/2032, make whole call.
In the competitive market, DeKalb County, Georgia, (Aa3//AA-/) sold $435.22 million of water and sewerage revenue bonds (Second Resolution), Series 2025A, to Jefferies, with 5s of 10/2026 at 2.24%, 5s of 2030 at 2.51%, 5s of 2035 at 3.37%, 5s of 2040 at 4.15%, 5s of 2045 at 4.64%, 5s of 2050 at 4.85% and 5s of 2055 at 4.90%, callable 4/2035.
Wisconsin (Aa1/AA+/AAA/) sold $263.46 million of GOs, Series 2025B, to Barclays, with 5s of 5/2027 at 2.26%, 5s of 2030 at 2.44%, 5s of 2035 at 3.25% and 5s of 2036 at 3.45%, callable 11/2034.
Oyster Bay, New York, sold $177.44 million of bond anticipation notes to BofA Securities, with 4s of 8/2026 at 2.50%, noncall.
AAA scales
MMD's scale was little changed: The one-year was at 2.23% (unch) and 2.25% (unch) in two years. The five-year was at 2.41% (unch), the 10-year at 3.22% (+1) and the 30-year at 4.58% (unch) at 3 p.m.
The ICE AAA yield curve was mixed: 2.21% (-3) in 2026 and 2.19% (-3) in 2027. The five-year was at 2.40% (-1), the 10-year was at 3.15% (unch) and the 30-year was at 4.57% (unch) at 4 p.m.
The S&P Global Market Intelligence municipal curve was little changed: The one-year was at 2.23% (unch) in 2025 and 2.25% (unch) in 2026. The five-year was at 2.41% (unch), the 10-year was at 3.22% (+1) and the 30-year yield was at 4.58% (unch) at 4 p.m.
Bloomberg BVAL was cut up to a basis point: 2.23% (unch) in 2025 and 2.25% (unch) in 2026. The five-year at 2.39% (unch), the 10-year at 3.15% (unch) and the 30-year at 4.56% (+1) at 4 p.m.
Treasuries were mixed.
The two-year UST was yielding 3.73% (-4), the three-year was at 3.704% (-3), the five-year at 3.82% (-2), the 10-year at 4.279% (flat), the 20-year at 4.857% (+3) and the 30-year at 4.881% (+3) near the close.
CPI
Most economists agree that despite a mixed consumer price index report, the Federal Reserve will cut interest rates at its September meeting, although some have reservations.
Investors must expect to deal with inflation and slower growth, "setting things up for stagflation-lite," said LPL Financial Chief Economist Jeffrey Roach. "Despite the increase in core inflation, we expect the Fed to cut rates next month as they pay closer attention to the weakening labor market."
The rate cut outlook remains unclear, said Wells Fargo Investment Institute market strategist Gary Schlossberg, as data still to come before the meeting could offer additional clarity.
"Topline CPI inflation stalled at 2.7% over the past twelve months, rather than climbing a third straight month as expected, while the rise in the indexes' core rate (excluding food and energy costs), to 3.1%, was the highest since early this year," he noted. "The bond market's rally immediately following the report took its cue from the more satisfactory news on the topline rate."
The increase in the core rate to its highest level since February "is not hot enough to derail the Fed from cutting rates in September," said Seema Shah, chief global strategist at Principal Asset Management. "There is some sign of tariff pass through to consumer prices but, at this stage, it is not significant enough to ring alarm bells."
The Fed is concerned that as inventories are exhausted, "the tariff-induced boost to inflation is likely to grow over the coming months, meaning that inflationary pressures are likely to pick up just as the Fed starts to resume rate cuts," she said.
The markets liked the print, Shah said, "as it means the Fed can lower rates unheeded next month — rate cut decisions in October, December and beyond may well be more complicated."
AssetMark CIO Christian Chan agreed. "While core inflation rose at the fastest pace since January, this report will not be enough to dissuade the Fed from cutting rates in September."
The tariff issue "will continue to play out over the next few months," he said, as inventories were high enough to keep tariff-related price hikes "manageable."
But increasing "signs of a bull steepening yield curve" suggest that rate cuts are needed to keep the economy humming, said Chief Investment Officer for Comerica Wealth Management Eric Teal. "Many traditional value sectors, like financials, will benefit from a steeper yield curve if the economy is able to dodge a material slowdown."
"Inflation was broadly in line with expectations as tariffs continue to be largely absorbed within profit margins," noted James Knightley, chief international economist at ING. "This gives the Fed the room to respond to the weaker jobs backdrop and cut interest rates in September."
The market won't get a clear picture of inflation "for some time yet," according to Katy Stoves, investment manager at Mattioli Woods. "These numbers make another case for cuts in September's Federal Reserve meeting, especially in light of softening employment statistics. That said, it will not make the job of Fed Chairman Jerome Powell any easier — this gentle cooling of the economy will certainly not justify a cut of interest rates to 1% as President Donald Trump is calling for."
Given the split results, "this month's report did nothing to convince anyone," said Northlight Asset Management Chief Investment Officer Chris Zaccarelli. Still, he said, "We don't believe that this report will deter the Fed from cutting rates next month."
Another CPI report and the employment report, which comes out before the September meeting, "will take on even more importance as the Fed decides whether to cut rates to preemptively support the labor market or whether the inflation reports are concerning enough that they feel like they need to sit on their hands and wait," Zaccarelli said.
While next week's Jackson Hole symposium may provide "further clarity on the Fed's evolving reaction function," Daniel Siluk, head of global short duration and liquidity at Janus Henderson Investors, said, "In our view, the Fed will look through the noise in goods inflation and focus on the broader macro signals; labor market softness, consumer fatigue, and the risk that slowing growth could become deflationary over the medium term."
The report "does not derail the case for a September cut, if anything, it supports it," he added.
The as-expected data "will not change the outlook for a September rate cut," said Josh Jamner, senior investment strategy analyst at ClearBridge Investments, "but should provide a boost to risk assets with equities higher and interest rates lower as traders unwind hedges they had put in place to protect against the risk of an upside surprise in the data, which failed to materialize."
With tariff impacts still looming, he said, "we would be hesitant to read too closely into today's release."
"The Fed is getting the data support that the tariff effect on price level will mostly be transitory," said Alexandra Wilson-Elizondo, global co-CIO of multi-asset solutions at Goldman Sachs Asset Management. "Tariffs have yet to drive substantial price increases, as companies continue to offset cost pressures by drawing down inventories and adjusting prices cautiously due to perceived consumer price sensitivity."
With the Fed data-dependent, following this report, "the emphasis will now be skewed toward employment," she said. "In essence, this inflation print supports the narrative of an insurance rate cut in September, which will be a key driving force for the markets."
Although it will be "an awkward decision," for the Fed, Richard Flax, chief investment officer at Moneyfarm, said, "financial markets imply a high likelihood that the Federal Reserve will cut rates in September and on balance we think this report shouldn't significantly shift those expectations."
Art Hogan, B. Riley Wealth's chief market strategist, agreed, "The report will likely not change the path forward for the Fed, as we expect to see rate cuts at the next three meetings."
The impact of tariffs hasn't raised prices as much as feared, according to FHN Financial Chief Economist Chris Low. "On balance, this report does not change the picture from the Fed's perspective. A September rate cut remains likely, with this week's retail sales the next critical economic factor."
The report was in line with forecasts, noted BMO Chief U.S. Economist Scott Anderson. "Services inflation really drove the price increases last month, while goods and commodity inflation remained more subdued than anticipated," he said. "This suggests many businesses remain reluctant to fully pass-along tariff increases for fear of losing sales to a more cautious consumer. Despite the unwelcome increase in core CPI inflation over the last two months, the Fed will likely actively consider a rate cut in September, if the labor market shows more signs of softening in August."
UBS Global Wealth Management expects rate cuts to resume in September, with a total of 100 basis points of easing, said its CIO Americas and global head of equities Ulrike Hoffmann-Burchardi.
But Larry Tentarelli, chief technical strategist for Blue Chip Daily Trend Report, said, "two consecutive months of higher 12-month inflation will make it difficult for the Fed to justify a rate cut at their September 17 meeting. If the Fed has to choose between shoring up the labor market or fighting inflation, we believe they will opt to backdrop the labor market."
Also in the anti camp, Comerica Bank Chief Economist Bill Adams said, "The report makes the Fed slightly less likely to cut in September, since July's hotter-than-expected core inflation was from sticky service prices rather than tariff-affected goods."
Comerica expects no rate cut in September, "but it's a close call. Another downside surprise from jobs data could easily tip the Fed's balance of opinion toward a cut."
Primary to come
The Port Authority of New York and New Jersey (Aa3/AA-/AA-/) is set to price Wednesday $1.137 billion of consolidated bonds, consisting of $173.88 million of Series 249 and $963.53 million of Series 250. Ramirez.
The New Hope Cultural Education Facilities Finance Corp. (Aa3/AA/AA-/) is set to price Wednesday $600 million of hospital revenue bonds (Children's Health System of Texas), consisting of $500 million of Series 2025A and $100 million of Series 2025B. Goldman Sachs.
The South Dakota Health and Educational Facilities Authority (/A+/AA-/) is set to price Wednesday $454.145 million of Sanford revenue bonds, consisting of $279.1 million of Series 2025B fixed rate bonds, $75 million of Series 2025C-1 tender bonds, $75 million of 2025C-2 tender bonds and $25 million of Series 2025E forward-delivery bonds. J.P. Morgan.
Philadelphia (A1//A+/) is set to price Thursday $369.02 million of airport revenue and refunding bonds, consisting of $107.845 million of non-AMT/governmental airport revenue bonds, Series 2025A, and $261.175 million of AMT/private activity airport revenue and refunding bonds, Series 2025B. Wells Fargo.
The Florida Local Government Finance Commission is set to price $333.455 million of non-rated senior living revenue bonds (Fleet Landing at Nocatee Project), consisting of $173.515 of Series 2025A, $16 million of Series 2025B1, $22.25 million of Series 2025B2, $115 million of Series 2025B3 and $6.69 million of Series 2025C. Ziegler.
Fort Bend County, Texas, (Aa1//AAA/) is set to price Thursday a $270.46 million deal, consisting of $100.99 million of Series 2025A, $45.565 million of Series 2025B, $28.665 million of Series 2025C and $95.24 million of Series 2025D. J.P. Morgan.
The Texas Department of Housing and Community Affairs (Aa1/AA+//) is set to price Wednesday $250 million of non-AMT residential mortgage revenue and refunding bonds, Series 2025D. Jefferies.
The New York City Health and Hospitals Corp (Aa3/A+/AA-/) is set to price Wednesday $247.015 million of health systems bonds, Series 2025A. BofA Securities.
The Delaware River Port Authority (A1/AA-//) is set to price Wednesday $227.055 million of revenue refunding bonds. Raymond James.
The Arlington Higher Education Finance Corp. (Ba2///) is set to price Wednesday $175.96 million of education revenue and refunding bonds (Basis Texas Charter Schools, Inc.). Morgan Stanley.
The Iowa Student Loan Liquidity Corp. (/AA//) is set to price Thursday $160.95 million of senior student loan revenue bonds, consisting of $100 million of taxable Series 2025A bonds and $60.95 million of AMT Series 2025B bonds. RBC Capital Markets.
The Regents of the University of Idaho (/AA//) are set to price Thursday $137.78 million of general revenue bonds, Series 2025A. Wells Fargo.
The Mt. Hood Community College District, Oregon, (Aa2///) is set to price Wednesday $136.445 million of Oregon School Bond Guaranty Act-insured GOs. Piper Sandler.
The Alaska Railroad Corp. (/BBB-//) is set to price Thursday $124.22 million of AMT cruise port revenue bonds. BofA Securities.
The Grace Christian School National Finance Authority (/BBB-//) is set to price Wednesday $118.72 million of education revenue bonds (GRACE Christian School Project). Stifel Nicolaus.
Competitive
The Miami-Dade County School District, Florida, is set to sell $450 million of tax anticipation notes at 11 a.m. Eastern Wednesday.
The Anderson School District No. 4, South Carolina, (Aa1/AA//) is set to sell $115 million of GOs (South Carolina School District Enhancement Program) at 11 a.m. Wednesday.
Gary Siegel contributed to this report.
