Trading Desk Talk

With the passing of Dolly Parton last week, it seems appropriate to borrow one of her classics. “9 to 5” may be about the daily grind, but few jobs come close to chair of the Federal Reserve: The pressure is 24 hours, every word is analyzed, and every pause is interpreted. There’s little room for error, and a poorly chosen phrase can send stock prices and Treasury yields swinging. Add a president who is not shy about publicly critiquing your performance and, well, “what a way to make a living!”

For one day every August, one of the most important addresses to Wall Street takes place in a lodge some 2,000 miles away from Manhattan. In the shadow of Wyoming’s Teton Range, a small gathering of central bankers, economists, and other policymakers come together for the Federal Reserve Bank of Kansas City’s annual Economic Policy Symposium.

The K.C. Fed started the annual symposium in 1978 with a focus on agriculture. After four years, the organizers sought to broaden the conference’s agenda and entice then-Fed Chairman Paul Volcker to attend. Because Volcker was an avid fly fisherman, organizers went searching for a location within the K.C. Fed’s geographic territory that could offer good trout fishing in August. They eventually settled on Jackson Lake Lodge in Grand Teton National Park, where the symposium has been held since 1982. (The lodge is about 25 miles north of Jackson Hole Mountain Resort.)

The conference has become one of the longest-running central bank gatherings in the world. Attendance is by invitation only, with around 120 participants from over 70 countries. Participants are selected, in part, based on the year’s economic theme; this year’s is “financial innovation: implications for payments and policy.”

The conference has also become an opportunity for Fed chairs to communicate the likely direction of monetary policy. The following are key moments from some recent landmark speeches, as well as subsequent market reactions.

Ben Bernanke, August 31, 2012: “The quantitative easing foreshadow”

• Bernanke defended the Fed’s unconventional monetary policy tools and argued that additional accommodation could provide meaningful support to the economy.
• The 10-year note yield fell 7.5 basis points (bps) to 1.55% after his speech.
• The two-year note, already near historic lows, dropped by about 3.5 bps to near 0.225% (essentially pinned to the zero lower bound).
• Markets correctly read between the lines: Less than two weeks later, at its next Federal Open Market Committee meeting, the Fed officially launched its massive, open-ended third round of asset purchases, “QE3.”

Jerome Powell, August 23, 2019: “The dovish pivot”

• Just before Powell took the stage to deliver his speech, “Challenges for Monetary Policy,” China announced retaliatory tariffs on $75 billion of U.S. goods, escalating an already tense trade war. Powell directly addressed the intensifying U.S.–China trade war, stating bluntly that “setting trade policy is the business of Congress and the administration, not that of the Fed.”
• Then came the presidential response. Frustrated that Powell had not promised more aggressive rate cuts, President Trump asked on Twitter: “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”
• Amid the combination of monetary policy signals and escalating trade tensions, both two-year and 10-year Treasury yields fell by roughly eight bps on the day, closing at 1.52% and 1.53%, respectively.
• The closely watched two/10-year yield spread was pushed to the brink of a yield curve inversion, an historically accurate signal of impending recession.
• Later that day, Trump announced new tariffs on China, amplifying the flight-to-quality bid and compressing yields further. The downward move in yields intensified when markets reopened the following Monday.

Jerome Powell, August 26, 2022: “The pain speech”

• Two months before Powell’s speech, the Consumer Price Index peaked at a 9.1% annual increase, the highest since 1981.
• During his brief speech, Powell signaled that the Fed would continue to aggressively raise interest rates to crush demand, even if it brought “some pain” to households and businesses.
• Yields rose on the day, with the two-year note up three bps and the 10-year up 1.5 bps. However, the relatively modest initial market reaction suggested that many investors would need more than an eight-minute warning to fully price in all the implications of Powell’s speech.
• As subsequent Fed speakers and incoming data reinforced Powell’s message, a cumulative sell-off pushed the two-year note yield up 16 bps and the 10-year yield up 30.5 bps over the following two weeks.

Jerome Powell, August 22, 2025: “The labor market warning”

• Powell’s speech marked a dovish shift, as he flagged rising downside risks to employment, noting that labor market conditions had softened and that July payrolls came in below expectations.
• The clearest signal came when he said, “the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance” and “the stability of the unemployment rate and other labor market measures allows us to proceed carefully.” This shift surprised many economists, who had expected him to reiterate the Fed’s “wait and see” stance.
• The two-year note yield fell by almost 10 bps on the day to 3.69%, while the 10-year note yield dropped by over seven bps to 4.25%.
• The repricing also continued after the speech, pushing two-year note yields lower and marking a drop of roughly 34 bps for the month. By month end, federal funds rate futures implied an 80% probability of a 25 bp September rate cut.

Kevin Warsh hasn’t been in the Fed chair’s seat long enough to have a list of historically significant actions tied to his record. But if he is well known for one thing since starting the job in May, it’s his desire for the Fed to communicate less—a policy that flies in the face of the behavior of Warsh’s recent predecessors.

Bernanke, for example, was a big advocate of increasing communication with the public. He expanded the use of forward guidance and increased the frequency and clarity of the Fed’s economic outlook and inflation projections. In 2011, Bernanke started the tradition of holding public press conferences following every other Federal Open Market Committee (FOMC) meeting. He also adopted the release of quarterly Summary of Economic Projections in 2007 and “dot plot” interest rate projections in 2012.

Janet Yellen actively expanded dialogue with financial market participants, believing that predictable, transparent signals make monetary policy stronger, not weaker. For example, Yellen presided over the first monetary tightening following the Great Financial Crisis in 2007 to 2010 and went to great lengths to telegraph that significant pivot. Yellen became Fed Chair in early 2014 and spent much of that year discussing the tapering of the Fed’s post-crisis bond buying program, a process now known as QE or Quantitative Easing. In December 2014, the Fed adjusted its statement language to say it would be “patient” before beginning to normalize policy, sending a clear message to financial markets that liftoff was still a few months away. In March 2015, Yellen dropped the word “patient” from the FOMC statements and used press conferences and congressional testimonies to move to “data-dependent” guidance, stating that a rate hike could come at any meeting depending on inflation and jobs data. After delaying a highly anticipated move in September 2015 due to global growth concerns, Yellen then used speeches to prime the markets for a winter move. And in December 2015, the Fed officially raised rates for the first time in nearly 10 years, pushing the benchmark rate to a 0.25–0.50% range. (For the seven years prior, the fed funds rate was near zero.)

Jerome Powell was also a proponent of using frequent communication as a monetary policy tool and built on the practices of Bernanke and Yellen. Powell, for example, added press conferences to follow every FOMC meeting, rather than every other meeting. He moved away from academic jargon toward “plain English” statements and answers as well. As described above, Powell frequently used the Jackson Hole speech as an opportunity to pivot messaging about the Fed’s likely policy moves. Perhaps the most memorable was his “pain” speech in 2022, which warned U.S. consumers and businesses that it wouldn’t be easy to get high inflation back under control.

Finally, this short history brings us full circle to Kevin Warsh, who now insists that U.S. inflation is still too high and needs to be brought back to the Fed’s 2.0% target. Warsh’s speaking engagements as Fed chair have been, like Powell’s in 2022, brief and blunt by design. Warsh believes that too much public communication can back the Fed into a corner—limiting deployment of its tools to effect policy changes and leading investors to focus more on the Fed’s signals than on economic data.

The economic backdrop to Powell’s 2025 Jackson Hole speech was also much different than that heading into Warsh’s 2026 spotlight. Powell had a clear narrative (a softening labor market, with transitory tariff inflation), which gave the FOMC the confidence to approve successive 25 bp cuts in September, October, and December. Those cuts brought the fed funds rate to the current 3.50–3.75% range.

Warsh, for his part, is facing a much more complex landscape than Powell faced last year—and one that’s more difficult to justify the rate cuts that President Trump has long demanded. Inflation is creeping higher (the Personal Consumption Expenditures Price Index is 3.7%, year over year, vs. 2.7% in 2025), with significantly higher costs for energy, shipping, and some commodities, spurred by a Middle East war with no end game, as well as a large, complicated trade war. Meanwhile, the unemployment rate recently dropped to 4.1%, after rising to 4.3% in 2025 around this time. The country is also experiencing strong growth, with GDP above 2% over the prior year and the current Q3 estimate at 4.6%, according to the Atlanta Fed’s GDPNow forecast.

With that backdrop, here is our summary of Warsh’s inaugural Jackson Hole address: Warsh, August 28, 2026: “Unfinished business”

• Warsh delivered a distinctly hawkish message: “Here is my standard. We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job, our mandate, and our charge to keep.”
• He underscored that the 2% target is not flexible: “There should be no misunderstanding. The Fed’s price-stability objective of 2%, as measured by the PCE Price Index, is a firm, fixed target.”
• Warsh said that financial conditions don’t look restrictive to him, which indicates that current rates may not be doing enough to lower inflation.
• These remarks presented Warsh’s clearest acknowledgement that additional tightening could be necessary if inflation fails to show progress toward the target. But Warsh also stopped short of explicitly putting a September hike on the table and doubled down on his strategy of avoiding forward guidance, saying it “inhibits policy freedom.”
• Markets responded by increasing expectations for further tightening. Fed funds futures implied odds of a 25 bp September hike surged from 34% to 57% Friday afternoon; December odds jumped to 61%.
• The yield on the two-year Treasury note climbed from 4.23% to 4.31% as Warsh spoke, then proceeded to sell off to 4.35% by the U.S. close, its highest level in over a month. The 10-year yield barely rose while Warsh spoke but then sold off to 4.73% by the close—six bps higher on the day.

This trading desk was happy to hear Warsh’s resolve to finally get inflation under control. His determination might lead to rate hikes and higher rates for some time. Yet if the Fed succeeds in moving inflation back to its 2% target, longer-term Treasury yields should fall, all else equal. As Dolly Parton was known to say, “If you don’t like the road you’re walking, start paving another one.”

Municipal bond market update

The following update highlights several key themes currently shaping the municipal bond market, including record issuance trends, supply and demand dynamics, and recent rating upgrades and downgrades across the affordable housing, healthcare, and senior living sectors.

The municipal bond market includes taxable and tax-exempt bonds issued by, among others, states, counties, cities, townships, school districts, and public hospitals. The muni market also includes debt issued by public authorities, such as state housing and healthcare authorities for projects owned or developed by nonprofit companies and other borrowers. The muni market experienced record new issuance of $587 billion in 2025. Through the first seven months of 2026, volume is on pace to surpass 2025, with new issuance up 2% year over year. The 10-year average is $452 billion.

The record issuance environment is being driven by several overlapping forces, rather than a single catalyst. One of the biggest drivers of elevated issuance volume is that projects simply cost more than they did a few years ago. Inflation has increased the cost of labor, materials, equipment, and infrastructure, thus requiring issuers to borrow larger amounts to fund the same projects. Figure 1 compares 2025 and 2026 issuance volume with the yearly average since 2011, or the “post-GFC period.”

Many state and local governments delayed projects during 2022 to 2023, when rates were volatile and borrowing became more expensive. According to market participants, part of the recent volume surge reflects a rebound from the more muted supply environment of 2022 to 2023.

Today, within Lument’s core sectors, issuance fundamentals remain particularly favorable. The affordable housing sector continues to benefit from persistent housing shortages, aging affordable housing inventory, significant preservation needs, and rising workforce housing demand. Similarly, hospitals and senior living providers—which include independent living, assisted living, memory care, skilled nursing facilities, and continuing care retirement communities—largely postponed major capital projects during the COVID-19 pandemic and subsequent period of operating stress. As operating performance stabilized, many hospitals and senior living borrowers returned to the market to fund campus modernizations, facility upgrades, expansion projects, restructurings, and refinancings. Senior living providers are also increasingly investing ahead of favorable demographic trends, as growth in the 80+ year old population accelerates.

Record supply has not occurred in isolation, either. Demand has been exceptionally strong, as seen in healthy retail demand (especially in high tax states like California), continued growth of separately managed accounts for high-net-worth investors, mutual fund and exchange traded fund inflows, and healthy principal and interest payments frequently reinvested back into the sector.

As a result, while periods of elevated issuance have occasionally pressured municipal-to-Treasury ratios and contributed to short-term volatility, the market has generally demonstrated an ability to absorb supply levels well above historical norms. This resilience has been particularly evident during peak issuance periods, when attractive absolute yields and substantial reinvestment cash encouraged investors to deploy capital into the sector. The combination of strong fund flows and seasonal reinvestment demand has been a critical factor supporting market technicals throughout the year, too. Figure 2 shows generic municipal bond performance in relation to new issue volume and P&I flows since January 2025.

Since the beginning of 2020, credit performance has diverged significantly across municipal sectors. For example, senior living experienced some of the highest default activity in the municipal market, driven by occupancy declines, labor shortages and wage inflation, rising equipment and supplies costs, and other operating expense pressures. Municipal Market Analytics reported record levels of first-time payment defaults in the sector during 2020 to 2021 and identified senior living as one of the sectors most directly impacted by the pandemic.

By contrast, hospital credits generally experienced greater rating pressure than payment default activity, resulting in a wide dispersion of credit ratings. In the hospital sector, investors are mainly focused on volume trends, payer mix and reimbursement trends, labor costs, and operating margins. Affordable housing has remained comparatively resilient, supported by persistent housing demand, strong occupancy, government-supported rental programs, and agency-enhanced financing structures. The upshot: Multifamily housing generally demonstrated a more stable credit profile than hospitals and senior living during the period.

Figure 3 highlights municipal bond defaults in these sectors since 2020. Over this period, senior living experienced the widest swing from the most downgraded sector to the sector with the most fundamental improvements and rating stabilization. Meanwhile, the multifamily housing sector experienced the strongest and most consistent performance.

Credit conditions for the senior living and affordable sectors have also converged recently, after a period of significant divergence. Senior living providers experienced significant stress from 2020 through 2024, as pandemic-related issues contributed to elevated downgrade and default activity relative to the broader municipal market. While occupancy trends have improved and favorable demographics are beginning to support sector fundamentals, muni bond investors remain focused on reimbursement risk, labor availability, and operating margin sustainability, resulting in a more selective credit environment. Recent sector outlooks generally characterize senior living sector credit parameters as “improving to stable,” but still require careful borrower and project-level credit analysis.

Meantime, affordable multifamily housing demonstrated considerably greater credit stability throughout the pandemic induced economic cycle. Persistent housing shortages, strong occupancy levels, government-supported rental programs, agency financing programs, and long-term affordability restrictions supported consistent operating performance across much of the sector. Rating activity has also remained favorable, with housing agencies and affordable housing credits generally maintaining stable outlooks—and, in some cases, receiving upgrades. As a result, affordable housing remains one of the more defensive segments of the municipal market, benefiting from both strong underlying fundamentals and sustained investor demand for socially impactful, essential-purpose credits.

In addition, improving senior housing demographics and stable multifamily fundamentals suggest that both sectors are positioned to benefit from long-term demand trends. However, investors generally view affordable housing credits as offering greater cash flow stability and lower credit volatility. On the other hand, senior living credits offer potentially attractive spread opportunities for investors who are willing to underwrite occupancy and operating risks. From a pricing perspective, this means that senior living bonds generally receive lower ratings and trade at higher yields than affordable housing bonds with comparable maturity and call structures.

The outlook for the remainder of 2026 remains constructive. While muni bond issuance is on pace for another record year, investor demand, mutual fund and ETF inflows, and P&I reinvestment flows continue to provide a powerful technical backdrop for the asset class. Demand continues to absorb elevated issuance levels, and credit fundamentals across most municipal sectors remain generally stable. Municipal valuations are no longer particularly cheap relative to Treasuries, but technical conditions remain among the strongest experienced in recent years.

The primary risks to this outlook include:

• A resurgence of inflation that places upward pressure on Treasury yields
• A higher-for-longer Federal Reserve policy stance
• Increased interest-rate volatility that weakens investor demand
• A meaningful slowdown in mutual fund and ETF inflows

Note that 75% of these risks are macro-related (i.e., not unique to municipal credits or the muni bond market). Absent these developments, municipal bond spreads are likely to remain within recent ranges; investor demand should continue to support elevated issuance, too. Yet should one or more of these risks emerge, spreads would likely widen to attract additional investor participation and facilitate market-clearing execution.

FROM THE DESK

Agency CMBS — Volumes remained low again last week, as the summer vacation season wound down before Labor Day. Fannie Mae new issue volume was around $1.3 billion, while spreads were flat to one basis point wider, week over week. Ginnie Mae spreads were also one bp wider.

Municipals — AAA tax-exempt yields were mixed last week, with the front end of the curve rallying while intermediate and long maturities moved modestly higher. Despite a continued elevated new-issue calendar, primary market pricing remained stable and deals generally cleared at spread levels consistent with recent weeks. Municipal bond fund flows remained supportive, with approximately $1.4 billion of net inflows during the week, including $303 million into high-yield bond funds. Strong investor demand and ongoing reinvestment cash continue to provide favorable technical support for the market, helping to absorb robust issuance volume.

The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.