Six-Month Review
Over the past six months, yields have been on the rise throughout the Treasury curve (Figure 1). The increase in rates is due to a variety of factors, including the ongoing conflict with Iran, broader inflation uncertainty, a more hawkish Fed Chairman than expected, and signs that U.S. deficit spending will continue to grow, increasing Treasury supply. While many market participants hoped that 2026 would bring a cut to interest rates, the path to a rate hike in the coming year is becoming more and more clear.
Last month’s jobs report did not inspire confidence in the current labor market; the U.S. private sector added just 57,000 jobs in June, down significantly from May’s 129,000 figure. Moreover, the previously reported gains in April and May were revised lower by 74,000 jobs.
The largest weaknesses were in the leisure and hospitality category in June, particularly hotels and restaurants. Many economists watch this sector closely, as it can offer an early warning sign of consumer spending and pullbacks. In the healthcare sector, only 22,000 jobs were added, compared to last year’s monthly average of 38,000. The Bureau of Labor Statistics also reported that oil and gas, construction, manufacturing, and transportation showed “little or no change in the month.”
Despite initial doom and gloom reporting, further inspection shows a labor market that is still strong (Figure 2). As Michael Feroli, JP Morgan Chase Bank chief economist, put it, “The June jobs report wasn’t quite as peppy as the prior three reports, but it still points to overall general health in the labor market. Before today’s revisions, the nonfarm job growth figures over the March–May period stood out as exceptionally strong.”
Indeed, the unemployment rate fell to 4.2%, the lowest reading in a year (though mainly because an estimated 700,000 workers dropped out of the workforce). Average hourly earnings also advanced by 3.5%, year over year, and by 0.3%, month over month.
Figure 3 shows that, after an initial tightening at the beginning of the year, spreads have remained fairly consistent over the last few months. Initial compression at the beginning of the year is common: Investors have fresh balance sheets and bigger appetites for bonds. Despite Treasury volatility caused by the Iran conflict, investor demand remained relatively stable. And strong investor appetite remains in our sector despite macro uncertanity (Figures 4–6).
FOMC minutes
The Federal Open Market Committee (FOMC) unanimously voted to hold its benchmark federal funds rate in a range of 3.5% to 3.75% at last month’s meeting, which marked the first assembly under Kevin Warsh. Last week, the minutes of last month’s meeting were released.
They showed that most officials agreed that there was a case for raising interest rates. But ultimately, the vote was unanimous to hold rates steady: “Participants generally assessed that information received over the intermeeting period suggested that upside risks to price stability remained elevated while downside risks to achieving maximum employment had moderated a bit.”
Warsh has long been critical of the Fed’s policy of forward guidance, and he refused to submit a rate forecast this time. However, nine other FOMC officials foresaw at least one 0.25% hike this year, and six officials anticipated at least two hikes; nine officials expected no move or a cut.
The minutes reflect officials discussing various scenarios that the U.S. economy could face in the coming months. Should inflation moderate, most officials said that they expected the Fed to “maintain or eventually lower the target range for the federal funds rate.” But should inflation remain elevated due to strong AI-driven demand and high energy prices as a result of the Iran war, most officials thought that “some policy firming would likely be warranted.”
Since the FOMC meeting, the overall inflation outlook continues to be cloudy. Energy prices remain tightly connected to the ongoing conflict with Iran, where renewed hostilities have put at least a temporary end to the recently announced cease fire.
Many believed, including President Trump, that Warsh’s tenure at the Fed would begin with dovish exuberance. So far, though, Warsh has appeared hawkish, including by vowing to implement several changes at the Fed—including re-examining how economic data is measured (such as whether the Fed’s current methods understate inflation) and reducing the amount of communication that comes from the Fed. Specifically, Warsh wants the Fed to communicate with shorter statements and limit the amount of forward guidance provided, so that policy options are on the table at all times.
One of Warsh’s favorite quips comes from George Shultz, a former U.S. Secretary of State and Secretary of the Treasury. “Press conferences are useful,” said Shultz. “But when you have one, you want to make sure you have something important to say.” True to Warsh’s distaste for forward guidance, the FOMC’s minutes provided minimal information on where policymakers, and Warsh himself, stand on future policy.
FROM THE DESK
Agency CMBS — Last week was relatively light in our market, with rates higher throughout the week. Seasonality is another major factor: the summer tends to be slower. Some $500 million Fannie Mae DUS came to market and spreads widened by two to three basis points through 15-year maturities. Ginnie Mae volume was low again too, as it was the week prior. (The final week of June saw over $500 million rate locks and the 10-year note dipped below 4.40%.) Spreads were flat, week over week.
Municipals — AAA tax-exempt yields were higher throughout the yield curve, week over week. Thanks to the combination of July reinvestment cash hitting investors’ books, positive fund flows, and a lighter issuance calendar as market participants were coming back from the holiday, we saw deals well supported in the primary market. With the first half of 2026 over, the market saw approximately $295 billion of deals come to market, which was up 5.2% compared to a year ago. (Last year, the municipal bond market recorded its highest bond issuance total ever). Municipal bond mutual funds continued to see positive inflows, attracting $1.4 billion during the week; high-yield funds saw $109 million of those inflows (8% of total inflows for the week).
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.
