Far From A Foregone Conclusion

Federal Reserve Chairman Jerome Powell opened his remarks following the October 29^th quarter point interest rate cut saying: “A further reduction in the policy rate at the December (10^th) meeting is not a foregone conclusion, far from it.” I am not a Fed watcher, but I applaud a statement that at least appears to be forceful.

Mr. Powell may be frustrated in my opinion. The Federal Reserve has cut the target interest rate 150 basis points, from 5.50% in September 2024 to this week’s 4%. What does the Federal Reserve have to show for it? When your mandate is to keep inflation low and employment high, I think the Federal Reserve should be frustrated, particularly when your declared inflation goal is 2% and we have not sniffed that level in years.

As we have discussed, the Federal Reserve merely follows Treasury securities yields. On October 17^th Bloomberg calculated a 103.4% chance of an additional quarter point cut at the December 10^th meeting. This corresponded to a 3.37% low yield on the current two-year treasury note. On October 28^th, before this month’s cut, the odds had already shrunk to 92.3%. This morning, October 30^th, after yesterday’s remarks, the odds shrunk to 69.8% as the treasury note traded at 3.63%.

Watch the market, not the verbiage. Whether short-term yields continue lower, stay steady, or rise is not my primary interest. My interest lies with longer-term yields, particularly the ten-year treasury notes, as this is the area of the curve that most affects bond market performance.

Last month I wrote that I was looking for the ten-year treasury to reverse course and move towards higher yields and lower prices. That quickly looked like it was the case, but the ten-year note followed the two-year note and traded at a new low yield of 3.93% on October 17^th; the note traded at 4.11% earlier this morning.

The last twenty-four hours have provided us with the greatest upward jump in interest rates (downward fall in price) in bonds in many months. Bonds had been on a steady climb (pricewise) as treasury yields pushed the Federal Reserves hand (twice) and provided optimism that, this time, interest rates are moving lower. I continue to believe the price climb was a counter-trend move and this week represents a kickoff for a return to trend (higher interest rates).

There has been plenty of activity this year in new issue municipal bonds and investors have been rewarded as prices on the new issues have generally risen as their interest rates have fallen. But we saw a similar pattern last year as much of the bond market’s positive performance for the first nine months of 2024 disappeared in the final quarter. If we get a repeat of that pattern this year and interest rates run higher instead of the continued expectation of lower, bond investors might, this year, have a scapegoat named Jerome to blame.

City of Corsicana, Texas

Combination Tax & Revenue Certificates of Obligation

Series 2025

A+ Underlying S&P

NR/AA/NR on BAM Insurance

Due 2/15   Dated 11/25/25 Maturity 2/15/45

$19,105,000 Sold

Years   Maturity       Coupon        Yield*

0         2026             5.00%           2.89%

1         2027             5.00%           2.78%

2         2028             5.00%           2.70%

3         2029             5.00%           2.68%

4         2030             5.00%           2.65%

5         2031             5.00%           2.68%

6         2032             5.00%           2.74%

7         2033             5.00%          2.86%

8         2034             5.00%          2.87%

9         2035**          5.00%          2.96%

10       2036**          5.00%          3.09%

11       2037**          5.00%          3.25%

12       2038**          5.00%          3.36%

13       2039**          5.00%          3.49%

14       2040**          5.00%          3.61%

15       2041**          4.00%          4.00%

16       2042**          4.00%          4.05%

17       2043**          4.00%          4.15%

18       2044**          4.125%        4.25%

19       2045**          4.125%        4.30%

*Yield to Worst (Call or Maturity) **Callable 2/15/34

Source: Bloomberg

This is an example of a new issue priced the week of 10/27/25. Provided for illustrative purposes only and is not a recommendation to buy or sell any specific investment.

Prices, yields and availability subject to change. Investment return and principal value of fixed income securities may fluctuate, and bond prices are subject to interest rate risk, credit risk, and liquidity risk.