Interest Rate Movements and Impacts
Both taxable and tax-exempt rates were volatile throughout the first quarter of 2026, as geopolitical developments disrupted what had been a constructive start to the year. Municipal bond returns were comfortably in the green through January and February, fund flows were trending positively, and market participants were feeling cautiously optimistic about a resumption of Fed easing. That narrative shifted abruptly in late February as the escalation of conflict in the Middle East drove oil above $100 per barrel, reignited inflationary pressures, and sent yields sharply higher across the curve. The 10-year Treasury rose from 3.97% in late February to 4.41%, while the 30-year has climbed to 4.97% by May 7th. Tax-exempt MMD yields have followed a similar trajectory, with the 10-year MMD at 2.98% and the 30-year at 4.33% as of early May, each up meaningfully from their February 27th levels of 2.52% and 4.17% respectively. Against this backdrop, the Federal Reserve held the federal funds rate steady at 3.50%–3.75% at its April meeting, with updated projections reinforcing expectations of an extended hold as persistent energy-driven inflation clouds the outlook for easing.
Economic Developments
Before the onset of the U.S. war in Iran, speculation surrounding the much hoped-for soft landing dominated market discourse. As the economy moved towards the peak of an expansion that began back in May of 2020, market participants sought to determine whether the business cycle was poised for a mild contraction or a renewed expansion after passing the next inflection point. While the war in Iran and its inflationary consequences have since complicated that picture, a closer examination of leading economic indicators hint at a fundamentally resilient underlying economy.
The Institute for Supply Management (ISM) New Orders Index, which measures month-over-month changes in manufacturing demand, registered 53.5 in March, down from 55.8 in February. Readings above 50 indicate expansion; those below signal contraction. Though the index softened sequentially, it reflects a meaningful revival in manufacturing activity over the first quarter of 2026 following years of contraction. A second key leading indicator, average weekly hours worked, rose 0.7% year-over-year in March, moderating slightly from the 1.2% gain recorded in February. Average weekly hours are closely watched because a sustained decline typically precedes layoffs, providing early insight into future labor market conditions.
While forward-looking economic indicators remain broadly constructive, leading financial indicators tell a more complicated story. Renewed inflation fears, driven in large part by the cost of energy, have upended expectations for continued monetary easing, the very backdrop that historically supports both economic expansion and equity revaluation as investors rotate out of risk-off assets. The S&P 500 nonetheless climbed above 7,300 by the beginning of May, up roughly 7% year-to-date and 10.5% in April alone, as investors reassess narratives around the duration and scope of the Middle East conflict. In the fixed income markets, inflation concerns have triggered bond selloffs, with investors demanding higher yields as compensation for purchasing power erosion.
Ultimately, market participants have drawn confidence from a somewhat counterintuitive combination: robust economic output sustained through a period of elevated interest rates, paired with strengthening underlying fundamentals. Volatility tied to the Middle East conflict, the price of global energy supplies, and disruptions to shipping through the Strait of Hormuz have tested that confidence but have not broken it. The path forward hinges on whether the economy can maintain its footing through the close of hostilities, at which point a resumption of monetary easing could provide the final tailwind needed for the soft landing to touch down, if not smoothly, then at least safely.
Meet the Author
Noah Rosenbaum | [email protected] | (320) 460-1642
In his role as Analyst, Noah Rosenbaum provides analytical, research, and transactional support to the lead advisory team serving higher education, non-profit, and government clients with debt and derivatives advisory and reinvestment services.
Prior to Blue Rose, Mr. Rosenbaum worked for the Arns Davis Law Firm as an intern where he assisted attorneys by preparing deposition summaries and organizing case information for active litigation matters.
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