The Treasury yield curve steepened last week, with the 2-year Treasury yield declining 2 basis points to 4.17%, while the 30-year yield increased 6 basis points to 5.25%. Softer CPI and PPI readings which signaled contained price pressures and a 23,000 decline in payrolls supported lower short-term yields. Following these releases, expectations for a September Fed rate hike declined to 32%, compared with 44% the prior week. Long-term yields rose amid pressure from oil prices above $80 per barrel and concerns surrounding the growing federal budget deficit, which is now expected to surpass $2 trillion this fiscal year. Municipal bonds continued to outperform Treasuries last week, as short-term municipal yields declined and long-term yields remained unchanged. Municipal bond funds recorded $758.5 million of inflows last week and $1.3 billion of inflows the previous week, marking 17 consecutive weeks of positive fund flows. Negotiated municipal issuance will be heavy this week, with nearly $14 billion expected to come to market. Investors will focus on the July FOMC minutes, housing data, industrial production and continued developments in the Middle East.

Treasury yields fell 7 to 10 basis points last week as renewed hopes for a U.S.-Iran agreement pushed oil prices lower and eased inflation concerns. Yields declined further after July payrolls unexpectedly fell by 23,000 and wage growth slowed to 3.2%. Markets continue to anticipate at least one 25-basis-point rate hike by year-end 2026. Municipal bonds followed Treasuries, with yields declining by up to 14 bps as strong demand, reinvestment cash and continued fund inflows supported the market. Last week’s heavy municipal issuance was supported by roughly $35 billion of August 1 principal and interest payments being reinvested back into the market. Municipal bond funds recorded $1.3 billion of inflows last week, up from $761 million the prior week. Negotiated municipal issuance is expected to total nearly $12 billion this week. Investors will focus on July CPI and PPI data, which will provide further insight into the pace of disinflation and help shape expectations for future FOMC decisions.