Geopolitical risks continued to dominate headlines and market movements last week. Treasury and municipal yields increased by double digit basis points on Friday as markets dealt with oil shock inflation fears and the potential for Fed rate hikes. The concern over potential Fed rate hikes stems from Chairman Powell’s press conference on Wednesday following the March FOMC meeting. While the Fed left rates unchanged, Powell acknowledged that higher oil prices would lift near-term inflation and that inflation remains uncomfortably persistent. Markets have now fully priced out rate cuts and are even assigning an 80% probability of a rate hike by the end of 2026. However, market movements and expectations have been volatile since the start of the Middle East conflict, so the current expected path could easily change, especially if a resolution to the conflict comes to fruition soon. The bond market welcomed the news on Monday morning of preliminary negotiations with Iran and potential de-escalation, as the 10-year Treasury fell approximately 5 bps in morning trading on the news.

Treasury and municipal yields rose across the curve last week amid growing concerns that the Iran conflict could disrupt shipping through the Strait of Hormuz over a longer period of time and drive up inflation. Against this backdrop, February CPI came in as expected, while the core Personal Consumption Expenditures (PCE) Price Index ticked up to 3.1%, reinforcing the view that inflation is no longer accelerating but remains stubbornly firm. Municipal bond funds saw $612 million of inflows, compared to $1.4 billion in the prior week, marking 16 consecutive weeks of positive flows. Looking ahead to this week's March FOMC meeting, the Fed is widely expected to leave the fed funds rate unchanged at 3.50% - 3.75%. Fed funds futures now imply less than one 25 bp cut in 2026. The market is moving toward a higher-for-longer view, as inflation risks have resurfaced while growth has not softened enough to force the Fed’s hand.