(Bloomberg) — Municipal bonds rallied after weaker-than-expected job growth raised expectations that the Federal Reserve will start lowering interest rates this month to support the economy.
Yields on top-rated state and local government debt fell alongside those on Treasuries. Rates on 10-year benchmark tax-exempt bonds dropped 8 basis points to 3.05%, the lowest since April, according to data compiled by Bloomberg, with a greater move seen in other longer-dated securities.
The gains came after the monthly employment report showed job growth virtually came to a halt last month and the unemployment rate rose to the highest since 2021. The weaker-than-expected data cemented bets the Fed will cut resume easing monetary policy this month, ending a pause that’s kept its benchmark overnight rate unchanged for all of this year as President Donald Trump’s trade war cast uncertainty over the outlook for growth and inflation.
“Today’s weaker-than-expected jobs report has strengthen market expectation for a September rate cut,” said Alice Cheng, director of municipal credit at Janney Montgomery Scott. “Investors are looking to lock in the relatively higher yields ahead of the policy easing.”
Investors now see a quarter-point rate cut at the Fed’s Sept. 16-17 policy gathering as a sure thing and anticipate a total of three such cuts this year, according to futures contracts.
Municipal debt has underperformed other bonds this year, with state and local securities gaining just 0.63%, lagging a 4.85% increase in US Treasuries and 5.95% return for corporate bonds.
(Updates yield levels in second paragraph.)
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