Before the ceasefire, markets had essentially given up on Federal Reserve rate cuts in 2026. The probability of at least one cut by year-end had collapsed to roughly 25%, crushed by an oil-driven inflation spike that made the Fed’s job functionally impossible. With Brent crude above $100 and geopolitical risk premiums embedded across the yield curve, the narrative had shifted from “when will the Fed cut?” to “could the Fed hike?” The probability of a rate hike by year-end had climbed to nearly 25% on prediction markets — a remarkable shift from where expectations stood just months earlier.
The ceasefire changed that calculus sharply. Oil fell more than 16% on April 8. The 10-year Treasury yield dropped to around 4.30%, its lowest level in roughly three weeks. Fed cut probabilities by year-end jumped from 25% to over 43% in a single session, according to CME FedWatch data. The probability of a rate hike tumbled from nearly 25% to 14%. In the span of a few hours, the rate narrative had done a near-complete reversal — and the municipal bond market repriced accordingly.
For muni investors, the Fed’s path matters enormously, but the relationship between rate expectations and muni valuations is more nuanced than simply “cuts are good, hikes are bad.” Understanding where that nuance lives is what separates an advisor who manages muni duration strategically from one who simply reacts to whatever the Fed says next.
The front end of the muni curve — maturities from one to five years — is tightly correlated to the federal funds rate. When short-term rates decline, short-duration munis rally meaningfully and relatively quickly. Right now, the front end has been somewhat muted because the Fed has been sidelined: yields in the 1-to-3-year range have had limited room to rally while rate cuts remained a distant prospect. Demand for front-end munis was healthy through January and February, but the Q1 inflation spike compressed that trade. If the ceasefire holds and oil normalizes, the front end becomes considerably more interesting — particularly for clients reinvesting maturing bonds who want to capture current tax-exempt yields before they compress.
The long end is a different story, driven by different forces. Long-duration muni yields — the 20-to-30-year range — are influenced less by the fed funds rate and more by growth and inflation expectations, term premium, and supply dynamics. The 30-year AAA muni yield remains near 4.3%, elevated by historical standards and well above where it was in the post-pandemic era of suppressed rates. A single Fed cut won’t move this part of the curve dramatically. What the long end offers right now is income — durable, tax-exempt income at levels that haven’t been available for most of the past decade. An A-rated 20-to-30-year portfolio currently yields close to 4.47% federal-tax-free. At the top combined federal rate including the 3.8% Net Investment Income Tax, that translates to a taxable-equivalent yield exceeding 7.5%. If those bonds aren’t called and are held to maturity, the yield to maturity climbs further, producing a taxable equivalent closer to 8%.
The intermediate part of the curve — roughly 7 to 12 years — sits at the intersection of these dynamics and deserves particular attention right now. This segment offers meaningful yield pickup over the front end (the 10-year AAA yield is around 2.95% following the ceasefire rally, with more room to move if rate cuts materialize) while carrying less interest rate sensitivity than the long end. It also happens to be where dealer inquiries have been strongest in the weeks following the Q1 selloff, suggesting institutional buyers are finding the value proposition compelling. For advisors managing duration tactically, intermediate munis offer the most flexibility — positioned to benefit from rate relief without the full volatility exposure of a long-duration portfolio.
One additional variable worth monitoring is the muni-to-Treasury ratio, which measures the relative cheapness of munis versus comparable Treasuries. Following the Q1 selloff, ratios moved into more historically attractive territory — meaning munis are offering a higher percentage of the Treasury yield than they typically do. When ratios are elevated, the asset class has historically generated better forward returns. The current setup, with ratios above their five-year averages in the intermediate-to-long part of the curve, adds another layer to the investment case beyond the tax math alone.
The practical positioning framework: clients who prioritize durable tax-exempt income and can hold through volatility should focus on the 10-to-30-year range while yields remain elevated. Clients with near-term reinvestment needs who want to benefit from a potential cut cycle should weight the front end more heavily. And for all clients, the reinvestment risk of sitting in short-term instruments — waiting for the “right moment” to extend duration — is one of the most consistently underappreciated risks in fixed income. The longer clients wait, the more likely they are to miss the window.
