Happy New Year! Thank you for your continued confidence in our team of municipal bond specialists. As we close out another year, we are pleased about how we navigated the volatility of 2025 and remain focused on positioning client portfolios to capitalize on market opportunities ahead in 2026.

While much has changed over the past year, our approach to the stewardship of your assets has not. We remain deeply focused on this segment of the fixed income market and are committed to continuously enhancing our portfolio management, trading, and client service capabilities.

Over the past year, we have advanced several key initiatives:

• Environmental Risk Index: Developed a proprietary index that integrates natural disaster probability overlayed with county-based financial resiliency. We plan to release a white paper on this index in the coming year.
• Credit risk framework: An ongoing effort to strengthen both surveillance and forward-looking credit analysis. Through investments in technology and the development of internal systems, our credit team now covers a broader and more comprehensive segment of the municipal market than ever before.
• Portfolio management infrastructure: Through continued investments in technology, we have improved processing speed, increased operational efficiency, and enhanced our ability to scale.
• Firm Growth: Our team continues to expand with 26 total employees. Assets under advisement across the Bernardi Asset Management and Bernardi Securities platforms are now approaching $2 billion.

We look forward to further improvements in 2026!

2026: Will the Fed Pause and the Record Supply Streak Continue?

Municipal yields remain elevated by an uncertain path forward for Federal Reserve policy and heightened levels of supply issued by municipalities. The former is driven by uncertain inflation and employment dynamics, while the latter is underpinned by what will likely be a third year in a row of record supply levels. The combination of “top down” Fed policy uncertainty and “bottom-up” municipal supply dynamics should present many attractive opportunities for investors next year.

Municipalities across the country continue to fund new projects at record pace as both the need and cost of funding infrastructure has risen dramatically in the last five years. Generally, municipalities can afford this infrastructure buildout given high cash balances, stable underlying revenue streams, and a growing economic environment. Importantly, the “shadow liabilities” (i.e. pensions) of many have decreased significantly over the past five years, providing municipalities with increased capacity to issue debt responsibly.

Moody’s noted in a July 1^st publication that US public pensions have exceeded their annual target returns three years in a row. And that overall net pension liabilities have declined for five straight years. The closing of the pension deficit during this period has been massive. Total net pension liabilities amount to $2.1 trillion today, down from over $6 trillion in 2020.[1]

A combination of heightened funding amounts, strong asset returns, and higher bond yields has allowed states and local governments to significantly reduce pension deficits. Most states and local governments continue to aggressively fund these liabilities, which will further alleviate underfunding levels. Stronger pension funding levels, paired with a stable macroeconomic backdrop, pave the way for heightened issuance to continue into 2026.

Fed & Yield Outlook – How We are Positioning from a Duration Standpoint

The Fed cut rates by 0.75% (three 0.25% cuts) during 2025. The 10-year treasury is priced at a yield of 4.13% today, down 44 basis points (0.44%) since the end of 2024. If the economy continues to show resilience and inflation stabilizes in the high-2% range, the Federal Reserve may wait for more definitive progress on inflation before implementing additional rate cuts. This could increase long term rates marginally higher.

At the moment, the market is expecting two more rate cuts with a 33% chance of a 3^rd in December of 2026. The current Fed Funds Rate (FFR) is 3.75% (upper bound), so the market is essentially pricing in an end of year FFR of just over 3.00%. The FFR has averaged 2.10% since 2000 with a high of 6.50% (2000) and low of 0.25% (2008-2015, 2020-22). Consumer Price Inflation (CPI) is currently 2.70% (YoY) and has averaged 2.60% since 2000.

Given this context, by historical standards (at least since 2000), the FFR is high versus underlying inflation. The last time we were at such relative levels (FFR vs. CPI) was right before the dot-com bubble crash and before the Great Financial Crisis.  In fact, the FFR has been lower than underlying CPI for most of the time since 2000, and about 0.72% lower on average. Based on that average, a simple extrapolation to today’s inflation levels puts the Fed Fund’s Rate at 3% (in line with end of year market projections). Clearly, the Fed remains wary of the inflation embers reigniting, but there is certainly more room for cuts should inflation enter the mid-to-low 2% range.

From a client portfolio perspective, we welcome a patient Federal Reserve—one that keeps rates elevated long enough to avoid an economic downturn, but not so restrictive as to impair growth. Higher rates allow your portfolios to continue reinvesting at attractive yields, enhancing income, cash flow, and long-term total returns. Through the power of compounding, a sustained period of higher rates can be a meaningful tailwind for portfolio outcomes.

This dynamic of a historically high FFR relative to CPI gives us confidence to slightly overweight duration in portfolios. We aim to protect against interest rate risk through two mechanisms:

1. a laddered portfolio structure and
2. high allocation to high coupon bonds with attractive upside/downside profiles.

The former provides steady cash flow with a diverse maturity allocation. The latter provides heightened cash flows allowing quicker principal repayment (compared to lower coupon bonds) to redeploy at potentially higher prevailing market rates.

Ultimately, yield drives returns and longer duration strategies tend to outperform shorter duration strategies over time (up to a certain point). With a steep yield curve (longer term bonds yield more than shorter term), we believe now is a good time to slightly overweight duration. We’re targeting tax-exempt yields in the 3.50-4.00% range towards the middle-part and long end of a 15-year ladder. This equates to taxable equivalent rates of 5.55%-6.34% at the 37% bracket. We expect yields to remain in this territory for the time being, barring any material change in economic conditions.

This elevated duration approach worked for clients in 2025 and we expect will continue in 2026. With tax-exempt rates in the 3-4% range, now is the time to compound.

Thanks again for your confidence in our team and we wish you a happy and healthy 2026!

Sincerely,

Matt Bernardi
Sr. Vice President

[1] Moody’s Ratings, State and Local Government – US, Unfunded pension liabilities fall for a fifth year, down $4 trillion from 2020 peak; July 1, 2025

President Trump signed Bill Act H.R.1 on July 4^th and with its passage, any current threat to the tax -exempt status of municipal bonds ceased. This was a threat we believed was unlikely to become reality, but with the capricious nature of today’s politics, never worth taking for granted.

As we noted in December of last year: “The benefits of tax-exemption cannot just be measured in dollars alone, and we expect its importance to be highlighted and preserved throughout the tax negotiation process.”

This is a significant ‘WIN’ for states, counties, cities, villages, school districts and hundreds of other local governmental units across the country.

Tax-exempt municipal bonds have financed low cost infrastructure projects in communities across our nation since the ratification of the Sixteenth Amendment to our Constitution in 1913.  The Revenue Act of 1913 established federal income tax and also included a provision exempting interest on state and local municipal bonds from federal taxation.  This provision was included by the 63^rd United States Congress because it understood the critical role tax-exempt municipal bonds played in building a growing nation’s public infrastructure.

Sensibly and thankfully, the 119^th United States Congress understands the vital nature of municipal bonds to every single congressional district and it left tax-exemption intact.

It’s a gratifying result after many months of intense discussions and lobbying by thousands of communities’ representatives, local government officials, and other market participants.

“Bravo” to everyone on a collective effort very well done.  Our communities will benefit from these efforts for many years to come. 

ATTRACTIVE MUNICIPAL BOND YIELDS

A surging new issue supply and the impressive absorption of it by investors has been a major story in the first six months of 2025. Issuance during the first half of the year was approximately $280 billion, an approximate 14% increase year-over-year.  The new year began with a robust new issue calendar, an unusual dynamic for the municipal bond market. And this dynamic persisted into mid-summer. California, New York, and Texas led the issuance parade.¹  For the most part, impressive investor demand kept pace with this strong new issue supply.

Yields increased at certain points due to supply pressure, and yields are higher at the long-end of curve compared to the start of the year levels.  The table below of the “A” rated MMD Index² illustrates the point:

Source: Bloomberg, July 9th, 2025

Bottom line: The best relative value continues to sit at long end of the yield curve where ratios range from 80%-100% of the corresponding treasury.  These are attractive absolute and relative levels in our view. A 4.50% non-taxable municipal bond yield approximates 7.14% taxable equivalent for a taxpayer in the 37% federal income tax bracket.

We expect the new issue supply to wane in July-August, as is customary, but remain above 5-year averages. We expect it to pick up post Labor Day and remain elevated the balance of the year before falling off post-Thanksgiving. Overall, 2025 new issuance levels will significantly surpass 2024 record supply levels.

We believe the continued robust supply and resulting elevated municipal bond yields allows investors to lock in attractive high yields in this sector.  Periodic market volatility and corresponding dislocations are likely to continue in the coming months. Investors should study both primary and secondary market sourcing for investments toggling between the two markets as values wax and wane in each.

CONTINUED OPPORTUNITIES FOR TAX LOSS HARVESTING

One of the features of a separate account portfolio, is the ability to surgically manage tax liabilities. In this case, you can pick and choose which bonds to sell/buy and how much in tax losses you would like to capture. Tax losses can be used to offset regular income up to $3,000 and carry forward to offset capital gains you may have elsewhere in your portfolio(s). This has been a popular portfolio strategy as of late and a way to both increase cash flow, restructure portfolio into higher coupons, and capture losses to benefit your end of year tax liability.

When we conduct our tax loss swap analysis we consider selling vs. buying yield, tax loss captured, payback period of the tax loss vs. increase in cash flow, portfolio structure and duration changes, among other metrics. If you have any interest or questions about this process, please contact your Investment Specialist or Portfolio Manager.

Thank you for your continued confidence in our team and allowing us to assist you in navigating today’s fixed income market.

Sincerely,

Ronald P. Bernardi
President & CEO

[1] Source: Bloomberg

[2] Source: Municipal Market Data, June 30^th, 2025

A buyer’s market has emerged as tax-exempt yields hit an air pocket over the past couple of weeks, experiencing weak market conditions and, therefore, higher yields. The reason for the sell-off is due to a combination of fund outflows^[1] – possibly related to tax season liquidity needs and portfolio rebalancing – and a backdrop of rising treasury rates. The average 10-year AA rated municipal^[2] now yields 3.21%, up from below 3.00% at the beginning of March. Prices have moved down as they are inversely related to yields. This sell-off has occurred alongside treasuries, but to a greater extent. The 10-year treasury has moved to 4.23% from 4.10% in early March.^[3] This sets munis up for their most attractive relative valuation since 2023 and we believe a great entry point for investors.

Yields are nominally attractive with 5% taxable equivalent yields^[4] readily available for maturities under 10-years. Further out on the yield curve, tax-exempt yields of 3.80-4.25% are being priced in 11-17 year bonds. At the top bracket, this is equivalent to a range of 6.03%-6.74%. Furthermore, valuations compared to treasuries are compelling. This is demonstrated by the muni/treasury ratio. The higher the ratio, the higher the yield munis are relative to treasuries. This ratio now stands at 75%, nearing a 2-year high.^[5]With elevated yields and ratios, we believe now is an excellent time to rebalance into munis. 5.00-7.00% taxable equivalent yields at the top bracket are readily available.

Chart Source: Bloomberg, March 31^st, 2025

[1] According to LSEG Lipper Global Fund Flows, investors pulled $573mm from municipal-bond funds in the week ending Wednesday March 26^th.
[2] Source: MMD
[3] Source: Bloomberg
[4] When calculated at the 37% federal tax bracket
[5] Source: Bloomberg BVAL AAA 10-year Municipal Yield

Happy holidays and Merry Christmas! We wish you a healthy and happy new year as we turn the page on 2024.

2024 ended as a subpar year for fixed income returns as coupon interest was offset by a late year surge in yields. The Bloomberg Municipal Bond Index^[1] has returned 0.73% thus far year-to-date, after returning nearly 6.50% last year and averaging just below 3% since 2014. 2024’s flattish return is a reflection of the AAA rated 10-year municipal^[2] moving from 2.26% at the beginning of the year to 3.14% today. It increased by 37 basis points in December, alone. Typically, a subpar year for bonds is followed by good performance the next year. In fact, since the Great Financial Crisis, the average return of the Bloomberg index is 8.45% following a sub 1% return in the prior year. This is in no way a prognostication for 2025, but portends well for future bond performance.

Chart Source: Bloomberg

The increase in yields this year is primarily a result of plateauing inflation, steady growth, and, therefore, the Federal Reserve is less willing to cut rates relative to prior expectations. Trump’s reelection is also cited as a factor causing weakness in bonds as of late, not dissimilar to his first election in 2016 when the 10-year treasury yield increased from 1.85% on election day to over 2.40% a month later. That post-election sell-off nearly wiped out all gains for the year, and munis finished up a paltry 0.25% in 2016. Bonds bounced back in 2017, recording a 5.45% gain, as long term bond yields ended the year slightly lower.^[3]

The Fed’s Role in the Recent Selloff

Fed rate cuts are typically carried out in 0.25% (25 basis point) increments. At the last FOMC meeting the committee reduced its projection for rate cuts in 2025 from four (1.00%) to two (0.50%). It released this projection on the same day it cut the Fed Funds Rate to 4.50% from 4.75%. But because this cut was fully anticipated by the market and the pace of projected future cuts was not, rates increased during the trading day.

In fact, this has been the trend of yields since the first cut of the cycle on September 18^th. Since then, the Fed has cut the short term Fed Funds rate by 100 basis points (1.00%) from 5.50% to 4.50%. During this time the longer-term 10-year treasury has moved higher to 4.55% from 3.70%.

This is an atypical relationship between the Fed Funds Rate and longer term rates at the beginning of rate cutting cycles. During the previous two cutting cycles (2019 and 2007), the 10-year was at a lower yield than where it started 100 days after the first cut.

Chart Source: Bloomberg

This unique divergence between the two rates is a historical anomaly and a result of inflation that has flatlined – and in some cases picked up pace – the last three months. PCE (the Fed’s preferred measure of inflation) printed at 2.40% year-over-year in November, which was up from 2.30% in October, but down from 2.70% the previous year. During the last cutting cycle (2019) inflation moved lower over the next three months following the first cut due to a slowing economy. Today’s level of inflation remains above the Fed’s 2% target which has raised the probability of less cuts than the market previously expected and has largely underpinned this yield surge as of late.

Tax Reform’s Risk to Ratios

The municipal market digested blockbuster supply in 2024 (nearly $500 billion) and is expected to face even more in 2025. The market was unphased by the increased supply. As we noted in our October commentary, muni/treasury ratios have remained stable through the end of the year as both investor demand and high coupon repayments vacuumed up supply. Though we would welcome higher ratios, greater than 5%-6% taxable equivalent yields^[4] are readily available. This will keep ratios in check unless treasuries break into the 5% yield range or supply significantly surpasses last year.

On top of supply, congressional tax policy negotiations present headline risk to the market over the next year as key provisions from the Tax Cuts and Jobs Act (TCJA) of 2017 are set to expire Dec. 31, 2025. A further decrease in the corporate rate would lessen bank demand for municipals, incrementally pushing ratios higher for bank qualified bonds. It remains to be seen where individual income brackets will settle, but we would expect them to remain unchanged at the 2017 levels, with 37% being the top bracket. Should there be a change, the risk is to the downside which would also incrementally pressure ratios higher given a lower benefit from tax-exemption.

During every tax reform cycle, the threat of removing tax-exemption reemerges. This has been measured by the CBO to “cost” the Federal government $30-40 billion per year. Historically, as negotiations pick up, Congressional representatives hear from local leaders – mayors, treasurers, city administrators, superintendents, police commissioners – about the importance of preserving tax exemption as both an efficient and highly effective way to stimulate investment into local infrastructure. Historically, this resonates, and tax-exemption is preserved and, in many cases, broadened to other types of projects. The benefits of the exemption to local districts is immeasurable and far outweighs any CBO estimate, which has false assumptions in of itself.^[5]

Over $500 billion alone was raised by local towns and districts this year to fund infrastructure and the total market size is over $4 trillion. Without tax-exemption these figures would be significantly less or, if not, the tax burden on constituents would be significantly more (given higher taxable borrowing yields). For a country that already has a massive infrastructure deficit, this would put us even further behind.

What keeps tax-exempt yields relatively low for municipalities are the trillions of dollars individual investors keep invested in the market in order to secure principal and maximize after-tax income. The exemption has fostered a diverse capital market ecosystem composed of mutual funds, ETFs, separate accounts, electronic trading networks, broker-dealers, and advisors. These components enable the nexus that moves capital from investors seeking tax-exempt income to local projects that need low-cost financing.

Because projects are financed in a decentralized fashion by investors, the pricing mechanism is market-based and measured in yield. Yields are in large part derived by an obligor’s credit worthiness which is a measurement of how well they spend your tax dollars. Better management means lower yields, which means lower taxes and/or better local infrastructure and services for constituents. This aspect of the market keeps a lid on “bridges-to-nowhere” as dollars need to be paid for by the local population and local leaders’ reputation is on the line.

This decentralized, market-based feedback loop is enabled by tax-exemption with no federally centralized party dictating how or to whom capital should be allocated for local projects. The two most important inputs for if a project gets off the ground are need and ability to pay, rather than some sort of political connection or special interest group securing funds for a project.

Without tax-exemption, local taxes would be forced to increase, projects paired back, and the solicitation of funds from the central government greatly increased. With the latter, local control and, therefore, efficiency declines. Projects would be decided and financed less based on local input and fiscal judiciousness, and more on who has power in D.C. Not only is this a less efficient allocation of tax dollars but it also reduces community involvement, the bedrock of our federal republic.

If credit health is any indication of how well this market works, notice that 32 states are rated by Moody’s at Aa1 or better, which is equal to or better than the U.S. government! Only two states (Illinois and New Jersey) are rated below Aa3, demonstrating fiscal mismanagement is an infrequent bug, not a feature, in this market.

The benefits of tax-exemption cannot just be measured in dollars alone and we expect its importance to be highlighted and preserved throughout the tax negotiation process.

Thank you for your confidence in our team during 2024 and we look forward to working with you in 2025!

Sincerely,

Matt Bernardi

Sr. Vice President

[1] Source: Bloomberg (LMBITR Index) as of 12/30/2024; Bloomberg Municipal Bond Index Total Return; duration 6.33, Time to Mty: 13.57

[2] BVAL Muni AAA

[3] Source: Bloomberg

[4] Assuming a 37% bracket

[5] For example, the CBO estimates that every dollar invested in tax-exempt securities would be reallocated to taxable securities/strategies.

Disclosures: All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Past performance is no guarantee of future returns. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable.

With money market fund rates of 5% taxable and over 3.25% tax-exempt (5.15% TEY¹), maintaining high cash balances is enticing. However, this is not an attractive long term investment strategy and will be a temporary mirage once rate cuts commence. In this piece we review various micro and macro factors that argue for employing an intermediate term laddered portfolio as a bond portfolio strategy instead of parking funds in the money market.

These factors include (in order from the macro to micro):

• Restrictive monetary policy
• A “soft-landing” proxy as insight into future bond returns
• Historical returns of cash vs. bonds
• Muni yield-to-worst perspective since the Great Financial Crisis
• Relative yield across the curve
• Notion behind the “ladder” portfolio concept

Is the Fed Restrictive?

Two main drivers of money supply (along with bank lending) are monetary and fiscal policy. Today fiscal policy is highly stimulative given our budget deficit is expected to reach nearly $2 trillion this year alone, up from the CBO’s prior projection of $1.5 trillion. This increases the money supply, which increases inflationary pressures. The Fed has been combating high levels of inflation by i.) raising short-term rates (via the Fed Funds rate and the interest rate on reserve balances) and ii.) reducing their balance sheet of treasury and mortgage-backed securities. Both these levers typically translate into reducing the rate of loan and money supply growth, thereby reducing inflation.

The crux of this monetary and fiscal policy dance (battle) is which is having a greater impact on the economy? If tight Fed policy is more than offsetting the stimulative fiscal policy, then both growth and inflation will slow.

At the moment, the market and most economists think it’s a net weight, hence the first rate cut is expected to occur at the September 18^th meeting, with 2-3 cuts total this year. One indication of restrictive Fed policy is that the Fed Funds rate (5.50%) is well above CPI (3.00%). If this trend continues – inflation moving lower – intermediate rates should remain at current levels or move lower in concert.

How this impacts money market funds: Cash and money market yields are highly correlated with Federal Reserve rate setting policy. As the Fed cut/hike rates, money market fund yields decrease/increase in association to this policy.

Bond Returns During the Last “Soft-landing”

The Fed is aiming to orchestrate a “soft-landing” scenario which is an analogy to launching a rate hike cycle (in order to combat inflation) and then be able to land the vessel (i.e. economy) softly without damaging its contents (i.e. high unemployment) with rate cuts. The Fed has succeeded so far in avoiding a recession. The unemployment rate remains low at 4.10% while inflation is 2.6% YoY (PCE²) down from 5.6% in 2022. The Fed’s ultimate goal is in the low 2%s.³

The last time the Fed accomplished this was in 1994-1995 under Alan Greenspan. Bond return s over the next 1-year and 3-year period (from the last rate hike) were very good as inflation petered off and remained stably low.

How this impacts money market funds: This period was a double-edged sword for cash returns as 1) rates were cut so this decreased cash yields and 2) longer bond strategies had attractive total returns, leading to major opportunity cost for those in a cash strategy.

Historical Returns of Cash vs. Bonds

The chart largely speaks for itself. Investing in cash/short-term bills (Bloomberg US Treasury Bill Index, June 2024) as a long term strategy is relatively unattractive vs. intermediate term bonds (Bloomberg US Treasury 7-10 Year Index, June 2024).

A reason for this is that yield drives return, and historically speaking, intermediate-to-long duration bonds pay higher yields than shorter term bonds. Today’s yield curve of higher short term rates relative to long term is both a mirage and aberration as this dynamic typically does not last for an extended period.

How this impacts money market funds: Cash/short term strategies have outperformed the longer duration 7-10 Year Index most of the time since this rate hike cycle started. However, if short term rates drop, their potential return will fall in concert, and limited price appreciation will be realized given the short time to maturity. Allocating funds to a slightly higher duration should outperform a cash-based strategy over the long run.

Yields at Highs Since Great Financial Crisis

We are at the high point of yields since the financial crisis in 2008-2009. This period was characterized by low-to-stable levels of inflation/growth and easy monetary policy aiming to combat this. Certainly, the next 15-years could play out differently as global economic forces transform.

The Bloomberg Muni Bond Benchmark has a 13.5 year average maturity and yield to worst of 3.59% (July 24th, 2024). This equates to a taxable equivalent yield of 5.69% at the 37% bracket and 5.27% at the 32% bracket. Both these yields are mostly higher than cash yields. This presents an opportunity to lock-in high yields for an extended period of time.

How this impacts money market funds: You can avoid the “cash-trap” of currently high floating rates by locking in intermediate-to-long yields at similar-to-higher levels in today’s market.

Relative Yield Offered by Municipal Bonds

The municipal yield curves continues to maintain its “J” shape. In that the front end of the curve (1 to 10 years) is inverted with short term rates higher than the longer portion of this segment. But as you move to the ~13-30 year portion of the curve, yields increase with significant steepness relative to the treasury bond market.

Across the curve we are aiming to lock in a yield to worst of 3.40%, which is like buying a 5.39% taxable bond at the 37% bracket.

5.39% is higher than any point of the treasury curve. So, in essence, implementing a laddered municipal portfolio today both maximizes yield and diversifies interest rate risk.

How this impacts money market funds: The 30-day average yield on your average tax-exempt money market fund is 3.25% or 5.15% taxable equivalent. Some may prefer the higher liquidity offered by this product vs. a 7-year municipal at a 3.40% yield. However, it is possible that a year from now the money market fund may have dropped by over 1% as the Fed cuts rates, while that 7-year bond is now a 6-year bond that you locked in at 3.40%. Furthermore, the bond will have realized price appreciation.

Notion Behind the “Ladder” Portfolio Concept

Ultimately, the aim is not necessarily to time the next phase of the rate cycle, but to diversify away from strategies that concentrate a large portion of a portfolio in any one part of the yield curve. Cash is a concentrated bet that yields will remain high or go higher. Certainly, this could happen and this strategy worked well during 2022 and parts of this year when rates increased dramatically.

However, as the Fed cuts rates and the yield curve normalizes, a “laddered” strategy is a higher duration strategy than a money market fund and one that diversifies across a large portion of the yield curve. This means it will i) lock in higher rates for longer and ii.) mitigate exposure to any one interest rate cycle. It is a bet on not making bets.

The pivotal input to defining the path of interest rates from here is how inflation plays out. And the defining input into bond portfolio performance from there will be duration. Should inflation continue to calm, higher duration portfolios will outshine lower duration allocations.

Cash has the utmost lowest duration risk on the yield curve.  This certainly comes with its benefits in its flexibility and liquidity. That said, from a bond investment strategy perspective, it is a concentrated bet on accelerating levels of inflation and/or tighter monetary policy (higher short term rates).

A ladder portfolio is a more diversified approach for your duration allocation. With both high nominal and relative rates offered by today’s market, we think it sets up very well for medium-to-long run performance.

Please reach out to your Portfolio Manager or Investment Specialist with any questions you may have as it pertains to portfolio positioning or the market in general.

Sincerely,

Matt Bernardi
Senior Vice President

[1] 30-day average yield of Federated Hermes Municipal Obligations Fund (Ticker: MOSXX); TEY = Taxable equivalent yield calculated at the 37% bracket.

[2] I use PCE as this is the Fed’s preferred measure of inflation. CPI is an alternative measure topped out at 9.1% in 2022 and last posted at 3.00%.

[3] Their explicit goal is 2%. But most believe if PCE prints in the mid-to-low 2%s, while continuing to demonstrate a trend lower in the “core” components, this will allow the Fed to begin cutting the Fed Funds Rate. PCE last printed at 2.6%.