The Federal Reserve has continued the easing cycle that began in September 2024, leading to a rally in Treasuries out to roughly 7 years. On the long end, however, yields remain elevated as the bond market continues to be concerned about inflation risk, fiscal policy, and a rising term premium.

The third quarter of 2025 was marked by continued volatility in interest rates, persistent inflation concerns, and growing debate over the trajectory of Federal Reserve policy. From June 30 through September 30, longer-term Treasury yields remained elevated as markets wrestled with resilient economic data and uncertainty surrounding trade and fiscal policy.

Markets reacted sharply to “Liberation Day” on April 2nd, as newly announced tariffs triggered fears of trade wars, sending stocks lower and yields higher. Geopolitical tensions escalated as well, with rising conflicts involving Iran, Israel, and the U.S., prompting greater caution from corporate leadership as inflation risks remain tied to global trade dynamics.

It has been an eventful beginning to Donald Trump’s second Presidency. He ran on a platform promising improved border security, expansive tariffs, re-shoring to bolster manufacturing in the US, and a clear focus on reduction of government spending and fiscal responsibility (DOGE). So far, he is trying to make good on all his promises.

With the transition from the Biden administration to President Trump’s leadership, 2025 has already seen significant economic and geopolitical realignments. The U.S. dollar has gained strength as markets react to the administration’s protectionist stance, including proposed tariffs of 25% on Canadian and Mexican imports and 10% on Chinese goods. While much remains uncertain as these policies undergo scrutiny, one thing is evident: Trump’s presidency is already reshaping global expectations.

The 10-Year Treasury yield has diverged from historical patterns during the Federal Reserve’s current rate-cutting cycle. Notably, this marks the first instance in 30 years (1994) where the 10-Year yield has increased immediately following rate cuts.

The FOMC continues to watch the economic data come in and so do we. There are factors that could make yields fall: higher unemployment, an increase in defaults, or an economic slowdown. There are also factors that could make yields rise: persistent inflation from re-shoring or higher tariffs, liquidity problems, or deficit funding issues. The consumer makes up about 70% of GDP and seems to be increasingly leveraged. Our federal government deficit also continues to grow…

While the 19 members of the FOMC are split on how many cuts we will see this year, we are firmly in the ‘2 or less camp’ while the economy remains strong. With a potential higher neutral rate and inverted yield curve, we believe an intermediate barbell strategy is best for Municipal Bond investors right now. With potential economic uncertainty ahead, we continue to believe municipalities are an attractive asset class providing stable cash flows and favorable tax treatment.