U.S. Treasury yields sold off last week, rising 10 to 15 basis points as escalating U.S.-Iran tensions pushed oil prices above $100 per barrel and reignited inflation concerns. Jobless claims dropped to their lowest level since 1969, suggesting employers are reluctant to cut staff even as broader economic uncertainty continues to build. Market participants are now fully pricing in a Fed rate hike by September, but no action is expected during this week’s FOMC meeting. Municipal bonds followed the Treasury market last week, with rates increasing up to 22 basis points. Demand for municipal bonds remains strong, as municipal bond funds recorded their 14th straight week of fund inflows. Municipal negotiated supply is expected to be strong at $6.6 billion this week, with over one-quarter of the volume coming from the healthcare sector. Over the weekend, the U.S.-Iran conflict remained relatively calm, opening the door to further peace talks and positively shifting market dynamics heading into this week. Market participants will be largely focused on the upcoming FOMC meeting on Wednesday alongside a heavy slate of economic data including Q2 GDP and PCE inflation.

U.S. Treasury yields ended a volatile week lower across the front end of the curve, while the long end remained largely unchanged. The week began under pressure from rising oil prices and geopolitical tensions, but sentiment improved after softer-than-expected June inflation data cooled rate hike expectations to one 25 basis point hike by year-end with a 26% chance of a second hike in 2026. Despite the rally in Treasuries, municipal yields moved higher and became cheaper relative to Treasuries. Municipal supply and demand remain strong, with municipal bond funds recording $1.4 billion in fund inflows last week and negotiated issuance expected to exceed $9 billion this week. The Federal Reserve will enter a quiet period ahead of their July 28-29 meeting, and the economic calendar is relatively light this week. However, market participants remain cautious, as renewed conflict and attacks involving Iran over the weekend may drive continued volatility and keep energy prices in focus. Overall, markets will continue to be headline driven between the conflict in the Middle East and future inflation readings.